Santa Clara, Calif.-based Ambarella Inc. (AMBA) offers semiconductor solutions for high-definition (HD) and ultra-high-definition (UHD) compression image processing and network processing. The company’s technologies allow the creation of video footage for wearable and automotive cameras, drones, and virtual reality cameras.

The company topped analyst estimates for its third-quarter earnings and its shares have since witnessed an unabated price rally. The company reported adjusted earnings of $0.57 per share for the quarter, beating the consensus estimate by 16.2%. Its $92.17 million in revenue surpassed the consensus estimate by 2%. AMBA’s shares jumped 25% in price last week. CEO Fermi Wang attributed the company’s improved earnings to its high-margin “transition into a deep learning AIoT processing company.”

Though the company’s operational execution remains solid, semiconductor supply dynamics remain challenging, and component shortages at other companies could significantly influence AMBA’s performance in the coming months.

Click here to checkout our Semiconductor Industry Report for 2021

Here is what could shape AMBA’s performance in the near term:

Industry Headwinds

Due to increased demand for electronics, electric vehicles (EVs), and other products, analysts expect the current global semiconductor shortage to persist in 2022. Outbreaks of COVID-19 variants and extreme weather in other parts of the world halted computer chip manufacturing while demand skyrocketed. This caused semiconductor prices to surge, constraining production of everything from phones to new vehicles. In addition, the CHIPS for America Act, a $52 billion plan that should  stimulate American semiconductor manufacture and research, is currently stalled in the House of Representatives. Although the U.S. Senate passed the measure last year, House legislators are still trying to secure funding for the provisions.

Mixed Profitability

AMBA’s 62.1% gross profit margin  is 25.7% higher than the 49.4% industry average. Also, its 18.9% Levered FCF margin is 58.4% than the 11.9% industry average.

However, AMBA’s 0.51% trailing-12-months asset turnover ratio is 20.2% lower than the 0.64% industry average. Also, its ROA, ROC, and net income margin are negative at 4.7%, 3.7%, and 9.8%, respectively. Furthermore, its trailing-12-months EBIT margin is negative 9.7%, versus the 9.1% industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the 15 Wall Street analysts that rated AMBA, 10 rated it Buy, and four rated it a Hold. The $217.36, 12-month median price target indicates a 12.3% potential upside. The price targets range from a low of $119 to a high of $260.

Premium Valuations

In terms of forward non-GAAP P/E, the stock is currently trading at 123.08x, which is 411.9% higher than the 24.04x industry average. Also, its 20.04x forward EV/Sales multiple is 396.4% higher than the 4.04x industry average. And AMBA’s 21.38x forward Price/Sales is 436.6% higher than the 3.98x industry average.

POWR Ratings Reflect Uncertainty

AMBA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMBA has a D grade for Value and Stability. The company’s higher than industry valuation is in sync with the Value grade. Also, AMBA’s 1.11 beta  is consistent with its  Stability grade.

In addition, the company has a C grade for Quality, which is justified given its mixed profitability.

Of the 100 stocks in the A-rated Semiconductor & Wireless Chip industry, AMBA is ranked #77.

Beyond what I have stated above, one can view AMBA ratings for Growth, Momentum, and Sentiment here.

Bottom Line

AMBA delivered better-than-expected results in its  last reported quarter. However, if governments worldwide fail to address the ongoing global semiconductor shortage, the company might struggle to stay afloat. In addition, given AMBA’s mixed profitability and lofty valuation, we believe investors should wait for the industry’s prospects to stabilize before investing in the stock.

How Does Ambarella Inc. (AMBA) Stack Up Against its Peers?

While AMBA has an overall C rating, one might want to consider its industry peer, Broadcom Inc. (AVGO), Semtech Corporation (SMTC), and inTest Corporation (INTT), having an overall A (Strong Buy) rating.

Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in AVGO for a 25% gain. Learn more about the RTR service here.

Click here to checkout our Semiconductor Industry Report for 2021

AMBA shares fell $1.02 (-0.53%) in premarket trading Monday. Year-to-date, AMBA has gained 110.76%, versus a 22.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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