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How We’ll Double Our Money Again With the Stock of 2014

3 | By Michael A. Robinson

I sure hope you didn’t lose faith this year in Ambarella Inc. (Nasdaq: AMBA).

The stock sold off shortly after I recommended it on Jan. 7, but I advised you folks to stick with this winning, fast-moving leader in video-processing technology. Those who did endured a tough patch when the stock declined by roughly 30% from early January to early May.

But staying the course proved highly profitable – Ambarella went on to gain roughly 53% so far this year.

And it’s up some 203% since I first recommended it back on Aug. 2, 2013.

Today, I want to show you the five reasons why the stock has had such a great run

But that’s just a start – today, I’ll also show you how, if we stick with it, Ambarella will double again from here…

A Five-Point Star

If ever there was a tech firm that meets all of the criteria of my five-part Tech Wealth Secrets system, it’s Ambarella.

Simply stated, this is one of the best semiconductor firms around. Its huge returns illustrate how a well-run niche player can leave the rest of the stock market in the dust.

Founded in 2004, the Silicon Valley company specializes in video-processing semiconductors that deliver high-definition images. Fortunately for Ambarella, video chips are badly needed in several fast-growing tech sectors.

Now then, when many investors see gains of 200% in less than 18 months, they may fear the run is over for a tech stock like Ambarella.

They’re wrong. This stock could still double again from here because of the strength it shows in each of the five rules I use for building wealth through tech stocks. Let’s take a look:

Rule No. 1: Great Companies Have Great Operations

Ambarella has this base covered. CEO Fermi Wang is a star among tech leaders. Wang holds several patents in his field and has a long track record of success.

Consider that he earlier cofounded Afara Websystems, a pioneer of advanced computer servers that is now a division of Oracle Corp. (Nasdaq: ORCL).

And he’s gotten a lot of help over the years from Les Kohn, a renowned chip expert Wang began working with nearly 20 years ago. They started out at C-Cube Microsystems, a pioneer in video-compression technology.

And Kohn now serves as Ambarella’s chief technology officer.

Wang has surrounded himself with other impressive executives. As a group, they have logged stints at such chip leaders at Intel Corp. (Nasdaq: INTC), National Semiconductor Corp. and NXP Semiconductors NV (Nasdaq: NXPI).

Rule No. 2: Separate the Signal From the Noise

For many investors, ignoring the hype proved difficult back at the beginning of January. At the time, the tech trades were speculating that Ambarella would become the power behind Google Glass, and the announcement would come at the Consumer Electronics Show in Las Vegas.

Instead, the two firms continuing their work together on Google Helpouts, Google Inc. (Nasdaq: GOOGL)’s “how-to” platform that lets teachers, counselors, doctors, home-repair specialists and others share their expertise through real-time online videos.

When the Ambarella-Google Glass partnership failed to materialize, investors were disappointed. On Jan. 8, the sold en masse after Needham & Co. downgraded Ambarella from “Buy” to “Hold,” saying the stock had gotten ahead of itself after running up 45% in a month.

That was the noise. Here is the signal: Ambarella is a well-run firm that is a go-to video chip maker in several high tech fields that have great long-term growth potential.

Rule No. 3: Ride the Unstoppable Trends

Ambarella undoubtedly adheres to this rule. Its chips are the brains behind one of the more successful wearable tech products out there — the helmet-mounted Hero action video cameras from GoPro. Inc. (Nasdaq: GPRO).

Ambarella also is benefiting from sales of the “connected car,” a major trend behind the current U.S. auto boom. The company makes chips used in high-def backup and dashboard cameras.

Beginning in 2018, new federal rules mandate that all new cars sold in the United States must have backup cameras. Over the past 15 years, the U.S. has averaged 15.5 million new vehicle sales a year – and that number is projected to rise 2.6% to reach 17 million new vehicle sales in 2015.

And Ambarella is one of the few chips firms out there with products optimized for the emerging field of ultra-high-def TV, (UHDTV), which offers resolution four times that of traditional high-def sets.

The Consumer Electronics Association trade group estimates that Americans will be buying 1.43 million UHDTV sets, or roughly 5% of TVs sold nationally, 2016. That’s a 60-fold increase from 2013, when UHDTVs debuted.

Rule No. 4: Focus on Growth

Over the past three years, Ambarella has logged average annual sales increases of 27%. Of course, the numbers vary on a quarterly basis, and in the most recent quarter they jumped by 43%.

And as the firm has grown, it has maintained great financials.

Ambarella has operating margins of more than 20% and earns nearly 22% on stockholders’ equity. The firm has $186 million in cash on hand and no debt.

Rule No. 5: Target Stocks That Can Double Your Money

This is where we look at Ambarella’s earnings and see how long it will take the firm to double profits. By doing that, we can figure out about how long it should take for the stock to roughly double.

After going through the firm’s financials in detail, I’m projecting earnings per share will grow by an average 22% over the next five years. And I’m being conservative. Over the past three years, the firm has grown EPS by double that.

Now, we use what I call my doubling calculator – the Rule of 72. Divide the compound growth rate of 22 into 72. We find that it should take Ambarella stock roughly 3.2 years to double once again.

We have one more thing going for us with Ambarella stock — its star status. Zacks Investment Research ranks Ambarella as a “Strong Buy,” and Investor’s Business Daily lists it as the top stock in its group.

Both Zacks and IBD are highly respected analysts, so their attention should bring solid support to the stock going into 2015.

Thus, shares of Ambarella will really juice up your portfolio.

You don’t have to find too many stocks of this quality to hop on the road to wealth.

And with a stock like this – one with staying power that meets all five rules of my Tech Wealth Secrets – you can turn the market’s volatility to your advantage. Just pick up more shares on dips, adding even more to your long-term gains.

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3 Responses to How We’ll Double Our Money Again With the Stock of 2014

  1. Chuck Finch says:

    Mike,
    What other tech stock would you recommend besides Ambarella to invest in. Please let me know your best stock.

    Regards,

    Chuck F

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