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Navellier’s “The Apple of Drone Stocks” Revealed

What's Louis Navellier's "Breakout Tech Play for 2016?"

By Travis Johnson, Stock Gumshoe, October 15, 2015

Louis Navellier has graced the pages of Stock Gumshoe quite a few times in recent months, so I didn’t jump on this pitch the first time we saw it a couple weeks ago… but we keep getting questions about it, so I guess we should get this one sleutholated for you.

This is, like most Navellier stocks, a pick that has already done very well — he’s a growth and momentum lover, so his stocks have usually had big runs before he picks them, and often look very expensive. And it is a “Drone stock” to at least some degree, though it’s not one of the builders of those robotic and remote-controlled flying machines. This particular pitch is for his Emerging Growth newsletter ($995/year), and he specifically points to the FAA’s eventual approval of drone delivery and heavier drone usage as catalysts for this “Apple of Drone Stocks.”

Here’s how Louis gets us interested:

“… it’s already handed investors 1,679% gains in five years
… it’s set to deliver another quarter of breakout earnings growth
… now is the perfect time to own it before the FAA approves the delivery of products in the U.S. and its stock price doubles investors money again”

So what is this “Breakout Tech Play for 2016?” Here are our clues:

“… virtually every major drone company is installing its high-definition video chips into its drones.

“The outcome has already resulted in,

  • Quarter sales growth of 73%
  • Quarterly earnings growth of 253%
  • One-year profits of 253%
  • Two-year profits of 563%
  • Five-year profits of 1,679%

“This is just the beginning as analysts estimate the company’s sales will jump from $6 million this year to $50 million in 2017 as the market explodes.”

What’s our secret stock? I shoveled that little pile of clues into the Thinkolator for you, and out comes our answer: this is video chip maker Ambarella (AMBA), a onetime market darling that has recently fallen on hard times.

And indeed, though the “Apple of Drone Stocks” pitch keeps rolling from Louis Navellier even today, the stock has actually slipped a spot in his ratings system — it was an “A” stock according to his PortfolioGrader service for most of the year, but dropped to “B” with a downgrade a couple weeks ago… right around when this ad started circulating.

Ambarella has been tied to their major customer GoPro, which accounts for about a third of AMBA revenues, since the IPO of the action camera maker — which was exciting for a while, but hasn’t been such a good thing of late. They make video chips and video processing software, primarily sold as an integrated “system on a chip” to manufacturers of video and still cameras, security cameras, and drones — drones are still a small slice of sales for AMBA, but that’s an anticipated high-margin growth market for them.

And yes, at least one analyst has estimated that their sales into the drone market will jump from $6 million in 2015 to $50 million in 2017 — but overall sales estimates for those years, from the few analysts who cover the stock, are about $325 million and $400 million, so drones may be a substantial driver of expected growth but they won’t be the primary contributor to revenue or earnings anytime soon. That analyst with the bullish drone projection has a $120 price target on the stock… which is actually right around where the stock was trading at the end of July when those estimates were getting attention.

Now, the price has been cut in half from those highs — shares are right around $60. Partly that’s a collapse of pretty much all momentum stocks, perhaps, but there are also real reasons for the fall — particularly AMBA’s guidance for decline next quarter in wearable camera sales (mostly, they say, because the growth came earlier this year — Xiaomi and GoPro both released new models in the second quarter this year, but in the third quarter last year). The worries about valuation, sales and competition at GoPro have also clearly hurt the Ambarella story — those worries are pretty well summed up by a bearish Barron’s article that came out about three weeks ago.

As with GoPro, Ambarella has seen its share price drop dramatically in a short period of time without any substantial change in earnings estimates. Analysts have not brought down profit expectations in any meaningful way in the last few months, they’re still expecting that AMBA will earn $3.12 in the fiscal year that ends in January, and $3.60 next year — it’s just that investors are now less confident about future growth and they’re no longer willing to pay 40X earnings for the stock, like they were over the Summer. Today AMBA trades for about 20X current-year earnings, and about 17X next year’s estimated earnings. Not bad for a growth stock… but, of course, you have to believe that they will continue to be a growth stock, and that competition won’t drag on their margins and profits.

Citron Research, a notable short seller that publishes negative research about companies, also called out Ambarella for its ridiculous valuation back in June — that had a quick impact, driving the shares down sharply for a short while, but the stock recovered to near its highs within a month. Maybe that helped to set the stage, and Andrew Left at Citron certainly looks pretty prescient with his $60 price target for the shares (that was his one-year target, back when AMBA was in the $120 neighborhood — his long-term target was $40).

That fall certainly takes away some of the risk at AMBA, since richly-valued semiconductor stocks are always worrisome. Competition is always right around the corner for most chip stocks, there are lots of companies that can and do make camera chips (and essentially every other kind of chip, too)… and chip designers face huge pricing erosion if they lose a step in the constant race to innovate… but 20 times earnings sounds a lot more reasonable than 40 times earnings. Still not cheap, and it could certainly fall more, particularly if competitors get some design wins with key drone or wearable camera makers, but if analysts are right about those earnings forecasts and the potential for Ambarella in the drone market, it’s not crazy to consider the stock around $60.

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6 years ago

Interesting stock. FWIW we have done some work on it. Were short for a while and now have no position. Here’s a link for those who are interested in the name. The TL;DR version is we’ve seen this movie before with stocks like OmniVision OVTI and it’s about the erosion of margins and slowing of growth which compresses the multiple. It’s just how it works over time…

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