I invested countless hours and thousands of dollars putting together a state-of-the art home theater at our house here in the Silicon Valley area.
It’s so good, in fact, that family members and friends tell my wife and me that it’s actually better than going out to the movies.
Just last year, I upgraded the theater space with a new 60-inch plasma technology high-definition TV (HDTV). Watching Blu-ray DVDs on this monitor makes the movies we watch seem so realistic that you duck during explosions and want to reach out and touch the actors that are right there before you.
So, imagine my frustration when I recently learned that the largest and most expensive “appliance” in my home is about to become obsolete.
And the odds are pretty doggone good that you’re facing the same dour realization …
But the news isn’t all bad.
With every change, you see, come new opportunities.
And today I’m going to tell you about a great one – small-cap firm that offers us a killer way to profit from the $3 billion shift to this new type of high-tech TV set …
The One Bet You Should Never Make
It wasn’t all that long ago that pundits were lamenting the end of the U.S. TV manufacturing industry – concluding that the shift of production to cheaper labor markets abroad was emblematic of a low-margin business that was no longer worthy of investor attention.
But a single catalyst has changed that once-disconsolate outlook.
And that catalyst was a breakthrough in display technology. Gone were the hulking and costly cathode-ray-tube (CRT) based TV screens that had reached their outer boundaries for improvement. In were new thin-screen formats that allowed for bigger TVs and incredibly crisp images. The HDTVs – like the one in my home theater – were so good that they appeared impossible to beat.
But one thing I’ve learned during my years out here in this bastion of innovation is to never – and I mean never – bet against technology.
It turns out an entirely new generation of HDTV sets have started to hit the market. The technical term for these new marvels is ultra-high-def TV. But industry insiders refer to the technology as UHDTV.
Simply stated, the images on UHDTV sets are as much as four times sharper than today’s most sophisticated television monitors.
In practical terms, this means you can get a much-bigger-screen TV with larger-than-life images.
Here’s why. The information on your TV screen is composed of lots of small digital dots called “pixels.” If you have a digital camera you already know how important pixel count is – the higher the pixel count, the greater the image sharpness, or “resolution.”
As makers added more pixels to the monitors, the images got sharper. And that allowed manufacturers to make bigger and bigger TV sets – without having to worry about the images getting blurry, washed out or otherwise distorted.
As incredible as it sounds, UHDTV is about to take your living room TV to an entirely new level.
Today’s best televisions sport roughly two million pixels. But the first generation of UHDTV sets has roughly eight million.
This new UHDTV threshold – known to industry experts as “4K” technology – is a true breakthrough in high-def TV viewing.
It means that in just a few short years, my “state-of-the-art” high-def set will appear about as sophisticated as a color TV from the 1960s.
This technology basically has turned 3D TVs into a nothing more than a fad. Consider that at the Consumer Electronics Show last January, essentially no media covered 3D sets. But they were all raving about the potential for UHDTVs
Indeed, the main thing holding this market back right now is price. But that will soon change.
With Change Comes Opportunity
The Consumer Electronics Association trade group predicts that just 23,000 UHDTVs will be sold in the U.S. this year. But that figure will soar more than 60-fold by the end of 2016 to 1.43 million sets, or roughly 5% of TVs sold nationally.
By the following year, says the market research firm NPD DisplaySearch, UHDTVs will account for nearly one-fourth of all televisions of greater than 50 inches sold in the U.S. market.
The market for sets of all size is worth an estimated $28 billion a year. So if, as some analysts suggest, UHDTVs take 10% of the market by 2018, we’d be looking at nearly $3 billion a year in sales.
At first glance, those sales predictions sound almost insane given the high cost of new UHDTVs. Consider that Sony Corp. (NYSE: SNE) has introduced an 84-inch 4K set priced at $25,000
Hoping to pick off market share from one of its top rivals, LG Electronics (066570: KS) announced that its 84-inch model will sell for about 20% less. But even at $20,000 a pop the LG sets will still give most consumers a bad case of sticker shock.
Moving closer to “entry-level” prices, Toshiba Corp. (OTC: TOSBF) is selling a 55-inch model in Japan priced at $8,700. On July 21, Samsung Electronics Co. Ltd. (005930: KS) began accepting pre-orders for two new sets – a 55-inch version priced at $5,500 and a 65-inch model with a price tag of $7,500.
Prices remain high because these are liquid-crystal display (LCD) sets that are manufactured to exceedingly precise manufacturing standards – and also because volumes in this new market remain low.
But you can count on prices falling as the industry’s run rate increases.
I can say that with confidence because those same economies of scale have played out in every high-tech product field we’ve seen in the past 60 years.
If you want an example, just look at how prices dropped in the HDTV market.
Back in 2005, according to NPD DisplaySearch, a 40-inch HDTV cost about $4,800. By last year, however, that same size TV – with an even-higher quality image – sold for roughly $560, a seven-year price decline of about 88%.
An Undiscovered Gem
The price tag of the UHDTV isn’t the only challenge.
There’s also the question of what you watch on it. At present, there are no TV shows broadcast in the 4K format.
But DVDs may soon be released in 4K. Sony’s recent sci-fi thriller After Earth was filmed in that format. (The movie bombed but tech reviewers say the visuals were simply dazzling.)
Other studios are expected to follow suit.
And as I’ve discovered, there’s a smoking hot small-cap, high-tech firm poised to play a big, big role in the creation of new 4K-format content.
This firm, the Santa Clara, Calif.-based Ambarella Inc. (NasdaqGS: AMBA) specializes in making semiconductors for the high-resolution video cameras used in sports broadcasting, which will be an early adopter of this technology.
Ambarella has introduced its sophisticated A9 chip in the consumer-digital-video market for 4K cameras. The firm is already known for supplying chips used in wearable high-definition video cameras like those that skiers attach to their helmets.
The firm’s video-imaging technology is also used in television broadcasting, with TV programs being transmitted worldwide using Ambarella’s image-compression chips. It also supplies chips to the security and automotive video recording markets.
Founded in 2004, the firm won several awards while still privately held. It went public in October 2012 at $6 a share. Today, the stock trades at about $17.50 a share, for a 191% gain.
But don’t worry; I still see plenty of upside.
With a market cap of $435 million, Ambarella has excellent financials. The company grew its most recent quarterly earnings by 82%. Over the past three years, Ambarella has grown earnings per share by about 22%, meaning they should double in just a little over three years.
This is one of those “under-the-radar” stocks that gives us a chance to profit from what will soon become a huge trend as the company helps change the way millions of us watch TV and make our own home videos.
Wall Street has yet to really wake up to this opportunity.
And that’s fine with us.
In fact, it’s one of our goals here at Strategic Tech Investor – to find ways to build your net worth long before Wall Street wakes up to these opportunities.
See you next week.
[Editor’s Note: Your feedback is very important. As always, I welcome your comments, questions, suggestions, and opinions. Post a comment below … I look forward to hearing from you.]