What OmniVision Teaches Ambarella Holders

Ambarella (AMBA) has been a white-hot IPO since coming out in 2012 it’s up over 1400%! The company is the current king of video-processing chips. More elaborately stated in their company description: “The company’s system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, professional and consumer Internet Protocol (IP) security cameras, telepresence cameras, and unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market.” It’s a great company and one that’s not a newcomer – they started out in 2004. They are also the “Intel-inside” the GoPro cameras which has helped win them an avid retail investor following. For anyone wanting to see the original story here are the AMBA IPO roadshow slides from 2012.

[Before we get started let’s be clear – this is *not* a call on the quarterly report coming today after the close. In fact we expect the company to easily beat Wall Street consensus of $80M in revenue and 81c of earnings per share. Maybe they will even beat the “whisper numbers” of $85M and 85c.]

The explosive gains the share price have been driven by strong and improving fundamentals. Most importantly the company has expanded operating margins from 10% in 2012 to almost 26% for the LTM ended April 30, 2015. Combined with accelerating revenue growth it’s the magic nirvana for growth investors – valuation be damned.

What we consider here isn’t the current merits of the investment case but the potential for a change of amplitude if not direction as strong industry factors, similar to gravity, begin to impact the company. The two charts below are amazingly similar and they set up the discussion. OmniVision (OVTI) was a rocket ship in the image processing space with their “camera on a chip” in much the same way Ambarella is with their “video system on a chip.” And it does great things for your stock as the product cycle drives revenue growth and margins. OVTI was up 1500% over the three year boom period for them. But watch what happens next…