1. Villanova Equity Society
New Member Stock Report
Current Stock Price / Date: [$54.55 / 12/7/15]
Company Name: [Ambarella Inc.]
Sector: [Technology]
Ticker: [AMBA]
Industry: [Semiconductor Equipment & Materials]
Recommendation: [BUY]
Analyst Name: [Julien Nifong]
Business Description
Ambarella is a leading developer of semiconductor processing solutions for high-definition (HD)
video capture, sharing and display. Ambarella’s base technology platform is flexible, enabling it to be
adjusted for multiple applications, and catalyzing fast and efficient product development. Ambarella’s
system-on-a-chip (SoC) designs provide high quality video, image, and audio processing functions and
low-power consumption, all on a single chip. Ambarella’s SoC designs are used to provide HD video
capabilities in wearable sports cameras, automotive aftermarket cameras, professional and consumer
Internet protocol (IP) security systems, telepresence cameras, and unmanned aerial vehicles (UAVs).
Ambarella derives value through the quality and application differentiation of its semiconductor
solutions. Having won multiple awards, including Global Semiconductor Alliance 2014 award for “Most
Respected Emerging Public Semiconductor Company,” Ambarella boasts a record of innovative product
development. Further, of Ambarella’s 495 employees, as of January 31, 2014, 72% worked in the
company’s research and development division, showing the company’s strong focus on efficient product
development in the future. As companies like Ambarella continue to advance technology, they expand
their own ability to grow by creating new markets.
Ambarella follows a strict design methodology that results in very high quality products with few
errors. Ambarella credits the success of its technology platform to its algorithm-driven design method in
which they repeatedly test their developments against their proprietary architectural model. This approach
enables them to recognize issues early on in the development process, resulting in a sound foundation for
hardware implementation.
Ambarella sells its solutions to equipment and design manufacturers globally, although the
majority of their sales are to companies located in Asia. Ambarella refers to their equipment customers as
their original equipment manufacturers (OEMs), and their design customers as their original design
manufacturers (ODMs). The OEMs are categorized as the end users of Ambarella’s solutions. Two
customer bases, in effect, use Ambarella’s solutions, and the equipment manufacturers generally source
Ambarella’s solutions through design manufacturers. Ambarella works very closely with several
equipment customers, such as GoPro Inc., Axis Communications AB, and Hikvision Digital Technology

2. Co. The OEMs source Ambarella’s solutions from ODMs such as Chicony Electronics Co., Asia Optical
Co. Inc., and Sky Light Digital Ltd.
Sales to Asian based customers represented 91% of sales in 2015, and 88% of sales in 2014. The
high percentage of sales to Asian companies is due to the fact that the majority of their OEM and ODM
customers are located in Asia. The final products, such as GoPro sports cameras, are sold globally,
though. In fiscal years 2015, 2014, and 2013, 94%, 88%, and 74% of revenue, respectively, was derived
from sales of solutions in the camera market, whereas 6%, 12%, and 22% of revenue was attributable to
sales in the infrastructure market during these years. Ambarella has been increasing its efforts and
presence in the camera market solutions industry.
Ambarella relies on a select few customers for the majority of its revenue. In 2015, sales directly
and through their logistics provider to their five largest customers accounted for roughly 64% of revenue.
Ambarella’s financial success is strongly correlated with the success of its customers and maintenance of
healthy relationships, which can be dangerous to Ambarella’s own financial strength. This reliance,
however, can also represent an advantage to Ambarella, as they have significant power when dealing with
some major customers, such as GoPro. Rick Munarriz reported a statement in which GoPro
acknowledges that, “If Ambarella stopped supplying components on acceptable terms…our business
would be materially and adversely affected.” The power that Ambarella has when dealing with its
customers is indicative of their strength and competitive advantage. The ability to work with a select set
of costumers, also allows Ambarella to directly work with their OEM and ODM customers throughout
product design cycles. Ambarella’s close ties to and strong working relationships with customers facilitate
the development of the best possible products. In an industry seeing growing competition, strong
customer relationships will give Ambarella an advantage in the future.
Ambarella elects to outsource the manufacturing of their products so that they can focus their
efforts on design, sales, and marketing of their solutions. Further, they do not have to incur the high costs
of owning and operating their own manufacturing facilities. Despite outsourced manufacturing,
Ambarella’s engineers work closely with foundries and contractors to ensure quality, increase yields, and
decrease costs. Further, Ambarella believes that their decision to outsource manufacturing greatly reduces
capital requirements while simultaneously allowing them more flexibility to react to market changes. If
they owned their own manufacturing facilities, Ambarella would have to incur significant costs to change
equipment to develop new products. By outsourcing manufacturing, they avoid these pressures and costs
by having the ability to change manufacturers with relative ease. Ambarella contracts Samsung for the
majority of its SoC production, and Samsung subcontracts assembly and initial testing of chips to
Signetics Corporation and STATS ChipPAC Ltd. Final testing of all products is completed by King Yuan
Electronics Co. Ltd., or Sigurd Corporation under the supervision of Ambarella engineers. Ambarella
works closely with its suppliers, integrating their own engineers into the manufacturing cycle to ensure
quality and efficiency.
The key capabilities Ambarella requires to maintain its value and growth is the ability to maintain
crucial customer relationships and continue to develop leading semiconductor technologies and
applications. Ambarella has succeeded due to the quality and prestige of its products, but exists in a
highly competitive industry. Through development of new products that serve updated consumer desires
and the expansion of and into new markets, Ambarella can continue to grow and build off of its value

3. proposition. Further, Ambarella maintains a very strong management team which as been crucial to their
success.
Industry Outlook
Demand and growth opportunities in the semiconductor industry, specifically those related to
video creation and distribution, have increased over the past several years. According to the Cisco Visual
Networking Index, mobile video will comprise 71% of total mobile traffic in 2016, representing a 90%
compound annual growth rate from 2011-2016. There are multiple market trends that have factored into
the growth in video creation and distribution. The development of mobile video capture devices with HD
capability has opened doors to a vast range of consumer and company opportunities. Video cameras were
traditionally large, expensive, and fragile, but recent innovations in the industry, many by Ambarella,
have introduced a new way individuals and large corporations alike to use video capabilities. Further,
recent developments in mobile data and the video cloud have enabled various video streaming
applications, such as YouTube streaming for personal enjoyment as well as IP uses. Ambarella is a major
provider of IP solutions, thus the new opportunities in video surveillance are valuable to Ambarella. More
recently, the drone market has been rapidly growing. Ambarella introduced two flying camera SoC
solutions for drones in 2015, establishing themselves as a key player in HD video drone developments.
End-user expectations for the capability and functionality of their video devices have increased
since the introduction of mobile HD video cameras, fueling a drive to continually introduce improved
products. Users now require devices to have the ability to capture HD video and still frames, wide angle
viewing, analytics, and transcoding. Further, users expect their devices to be highly durable and mobile,
which has given Ambarella an edge in the sports camera industry. Applications for analytics-capable
video devices are immeasurable, and the recent applications in the automotive and security industries are
especially valuable for Ambarella. Analytics in IP cameras is being used for capabilities such as counting
and tracking people. Forward Collision Warning Systems and Lane Detection Warning Systems are the
first of many automotive applications, and Ambarella has been pioneering automotive solutions since
2013. Ambarella is up to date on, taking advantage of, and in some cases partially responsibly for current
industry trends.
Applications for sophisticated portable HD cameras are innumerable, and several are quickly
becoming commonplace. The consumer drone market is estimated to reach sales of $4.5 billion in the
next five years, according to Tasha Keeney, an ARK analyst. DJI, a Chinese drone manufacturer, who’s
SoCs are supplied by Ambarella, is in the market for financing at $10 billion, roughly twice the size of the
market. The movement to arm all police officers with wearable cameras is valuable to Ambarella, as the
cameras would use Ambarella chips in many instances. These opportunities all provide optimism for the
company’s future.
Recent Developments
Ambarella management understands the highly competitive nature of the semiconductor industry,
and therefore engages in significant research and development projects. Their technology is their main
competitive advantage, and thus their success depends on their ability to improve their existing

4. technologies and introduce new solutions. Accordingly, Ambarella has established three R&D design
centers, located in the United States, China, and Taiwan. For fiscal years ended January 31, 2015, 2014,
and 2013, R&D expenses were $58 million, $48.8 million, and $42.8 million, respectively. Ambarella
devotes a large percent of their resources into R&D in order to maintain its technological competitive
advantage.
Ambarella was founded in 2004, and has introduced at least one new product each year.
Developments have increased greatly, however, in years 2014 and 2015, with the expansion into
automotive and flying camera markets, in addition to improved lines of wearable sports camera and
security solutions. Ambarella’s A12S and A9SE flying camera SoCs were introduced in October of 2015,
and were significant sources of revenue during quarter three of the 2016 fiscal year.
In their fiscal year 2016, quarter three earnings call, Ambarella’s CEO Feng-Ming Wang
announced that Ambarella’s Q3 revenue increased significantly in comparison to the previous year.
Revenue so far in Q3 is $93.2 million, representing a 41.9% increase over revenue in the prior year.
Ambarella saw strong sales from established products, specifically its IP and automotive cameras.
Further, Ambarella’s new markets, flying camera technologies and home monitoring solutions, saw
significant success. Flying cameras, driven by Ambarella’s new Ultra HD 4k, A12S, and A9SE SoCs,
experienced positive market reactions. DJI, a leader in the drone market, introduced its Zenmuse X5
series which use Ambarella’s compact micro fortress camera. Dr. Wang believes that sales will grow
more during the holiday season, as drones incorporating Ambarella’s flying cameras SoCs will be a
popular gift during the season, especially since the A12S and A9SE target affordable, sub $199.00 drone
models.
Stifel analyst Kevin Cassidy estimates fiscal year 2016 revenue to reach $323.7 million, earnings
per share to be $3.02, and a 12-month stock price target of $115. Fiscal year 2016 quarter 4 revenue is
estimated to be lower than quarter 3 revenue, according to Ambarella, reaching only about $65 million.
Ambarella CFO George LaPlante stated that high inventory levels within the wearable ports camera
market will have a notable negative impact in the fourth quarter, extending into the beginning of the next
fiscal year. Ambarella is still expecting strong annual growth in all other key markets. Fiscal year 2017
revenue is projected to reach $405 million, nonetheless. Given Ambarella’s recent growth and financial
stability, these projections seem obtainable.
Ambarella has experienced significant growth since its beginning in 2004, and has a record of
financial stability. Notably, Ambarella currently has no major long-term debt, and has quick and current
ratios of 5.23 and 5.74, respectively, which are significantly higher than industry quick and current ratios
of 2.17 and 2.75, respectively. Ambarella’s receivable turnover and inventory turnover are slightly below
industry, at 8.28 and 4.99 as compared to industry ratios of 9.81 and 5.78, respectively. These differences
are small, and should not alarm investors, especially given Ambarella’s profitability ratios. Ambarella
boasts a 5-year average gross margin of 64.55, as opposed to industry 5-year average of 6.23. Further,
Ambarella has a 5-year average growth rate of 25%, which is much higher than industry rate of -2.78%.
In a highly competitive industry, Ambarella has combined innovative technology with strong
management and capital structuring, resulting in a valuable company.
George LaPlante stated that the company has been having continuing discussions at the board
level on the use of cash for expenditures such as dividends and share buybacks. Ambarella will continue

5. to focus on expansion and M&A opportunities. M&A has been the only publicly discussed opportunity
for significant use of cash, outside of normal business practices and research and development. Analysts
at Pacific Crest Securities place Ambarella at the top of their list of companies they believe will be
acquired. Ambarella’s decision to retain earnings as opposed to paying dividends seems to be wise based
on high ROA, ROE, and ROI, of 25.9%, 30.9%, and 21.2%, relatively. Ambarella is still young, and its
decision to reinvest capital in business operations is a good decision.
Valuation
Ambarella’s stock fell over 50%
during the past few months due to a forecasted
slowdown in wearable camera sales, mainly
GoPro’s. and an attack by Citron Research,
who stated that the company was highly
overvalued and projected 12 and 18-month
price targets of $60 and $40, respectively. Ambarella is a growth-stage, disruptive technology company
with high potential for future growth, though, and this must be factored into the stock price. When
considering at Ambarella’s strong growth history, averaging 25% over the past 5 years, as well as forward
earnings projections, Ambarella will likely outperform its competitors in the years to come. Ambarella’s
current P/E ratio of 24.28 is relatively low given its historical and projected growth. Given all of
Ambarella’s many potential future revenue streams, such as automotive cameras, aerial cameras,
wearable cameras, and IP security cameras, their opportunities for growth are extensive. Ambarella’s
technologies are a necessary component in the development of machine vision in robots. As mobile robots
become more and more popular in the coming years, Ambarella will likely benefit greatly from its
advanced video and image processing chips which enable the generation of useful information from a
camera-feed. The chart to the
left shows the rapid projected
growth of machine vision
systems. There are countless
applications for Ambarella’s
solutions, and as technology
improves as a whole, more and
more applications will come
about. Ambarella’s P/E ratio is
not far above industry (16.63),
given its growth potential.
Ambarella’s stock prices
suffered from a market
overreaction, bringing the price
down to a level that seems to
ignore its potential, making now the perfect time to purchase Ambarella shares.

6. Investment Thesis
While Ambarella’s growth over the next 6-9 months may not be exceptional due to lag in the
sports camera industry, the company shows strong evidence for great future potential. The number of
possible revenue streams, coupled with Ambarella’s financial strength provides sufficient reason to
believe that Ambarella will outperform the market in the next 2-5 years. Ambarella is a small growth
company with significant forward potential, but could see problems in the distant future do to competition
by larger tech companies. Further, intellectual property in their industry is difficult to protect, which could
lead to a reduction in competitive advantage in years to come. If Ambarella continues its trends of
effective management and innovative product development, though, their ability to grow will continue for
many years, especially as new technologies open new doors. In closing, Ambarella, at its current price, is
a certain buy and should grow significantly over the next 5 years.
Sources
• https://ycharts.com/companies/AMBA/pe_ratio
• http://ark-invest.com/industrial-innovation
• http://finviz.com/quote.ashx?t=amba
• http://finance.yahoo.com/q/ks?s=AMBA
• http://www.barrons.com/articles/top-picks-in-semiconductor-m-a-1445888000
• http://quotes.wsj.com/AMBA
• http://www.benzinga.com/news/earnings/15/12/6023144/highlights-from-ambarellas-q3-
earnings-conference-call
• http://www.fool.com/investing/general/2015/10/01/why-is-the-market-punishing-
ambarella-inc.aspx
• http://www.fool.com/investing/general/2014/05/27/why-investors-should-buy-ambarella-
inc-on-the-pull.aspx
• http://edge.media-server.com/m/p/tjouyzpw
• http://investor.ambarella.com/secfiling.cfm?filingID=1564590-15-
2116&CIK=1280263#AMBA-10K_20150131_HTM_FINANCIAL_STATEMENTS
• http://www.reuters.com/finance/stocks/financialHighlights?symbol=AMBA.O#y6vQogT
2tl1j5UUd.97