The worst is over for Ambarella, a premier designer and maker of video applications and semiconductor chips. The stock fell like a drone struck by twin lightning bolts in the last year. But it’s a great turnaround opportunity given the stock has stabilized, the company is in a sweet spot of a hot sector, and it has prudent management.

Ambarella chips are the best of the breed. And that breed is low-power 4K system-on-a-chip processors that can record and store images in a flash, and at four times (hence the 4K) the resolution of high-definition video. Those chips allow cars (self-driving and otherwise), drones and other electronics to recognize objects and make decisions based on the stored information. You can find those chips powering video technology products with the biggest growth: security, sports, broadcasting, and 360-degree automotive cameras and film, for professionals and consumers.

Ironically, the company that lets devices see so well was blindsided when GoPro, which was responsible for a third of Ambarella’s revenue at one time, hit the skids. Then in April of this year a powerful earthquake hit Japan, and a major supplier for Ambarella—Sony—shut down its main factory. Ambarella’s stock fell from $125 per share in July of last year to the mid-$30 range before bouncing back to about $50 a share now.

But while Ambarella took a hit in both sales and profits, it’s coming back with a vengeance. In last year’s quarter ending in October the company posted sales of $93.2 million, which sank to $57.2 million in the quarter that ended in April of this year. Profits dipped from $29.5 million to $1.8 million, respectively. Analysts, however, predict sales for this year’s October quarter will rise to $94 million (with similar profitability as last year’s October quarter) and will keep rising at a strong clip into next year.

Growth Drivers

Ambarella is well-positioned in key markets. Its chips are used in products expected to grow briskly, including drones, sports cameras, mobile phones, home security and cloud-based cameras. That list includes the Ring Video Doorbell, a hot item that lets you answer your door from your smartphone. 

Perhaps the biggest potential growth area is virtual reality headsets.

 Ambarella CEO Feng-Ming Wang says the headsets have attracted interest from companies that include Google, Israel’s Human Eyes, and Chinese virtual reality pioneer Wushilan. Still, Ambarella doesn’t expect a rapid increase in revenue growth from VR just yet.

Cash Is King

We like frugal management, which is why we’re impressed by the level of cash and marketable securities Ambarella holds. During its bad April quarter the company had $323.8 million in liquid assets, an amount that expanded by $15.5 million from the previous quarter.

Especially encouraging is that inventories are stable as the company goes through a difficult period, a sign that management has a good grip on both demand and supply. The company downgraded its revenue outlook for the second quarter because of problems with Sony. But the stock has bounced back from its bottom, and we expect a steady rebound as analysts predict improved revenue and earnings in the third and fourth quarters.

Value Now, Growth Later

Given Ambarella should return to its former level of sales and profits later this year, its stock is a bargain and trading at more than a 50% discount to its price a year ago. Long term, the growth in 4K is expected to continue at a robust pace until 2025, as the technology is starting to emerge from film projection and extend into television.

A stock that is best of breed, has stout management, is buying back shares, has lots of cash on its balance sheet and offers short- and long-term growth prospects is a powerful combination. We believe that the current set of circumstances for Ambarella could push shares to around $75 in the next six months once the stock crosses the $50 to $55 threshold.

Buy Ambarella up to $57.

The Coming 4K Wave

Ambarella is a leader in 4K technology, which is an important step in the evolution of imaging in everything from car cameras to drones.

Just as content was once scarce for high-definition programming, it’s now scarce for 4K programming. This is especially true for content for home theaters fueled by streaming services, a growing broadcast segment. Broadcasters have been slow to adapt to the higher-resolution format because it’s more expensive—and the industry is traditionally slow to change.

To be sure, 4K is a huge leap in technology and resolution. High-density content requires screens to have 1,080 horizontal lines of pixels, compared to standard screens that have 1,080 interlaced lines.  By comparison, the 4K ultra high-definition  format has 4,000 horizontal lines, making the visual experience much more vivid. When you go to the movie theater, you are experiencing 4K. Now compare that to what you see at home or online.  

But here’s the good news. The trend is changing and is steadily picking up speed thanks to the growing demand for the ultra high-definition experience. The growth in 4K is expected to continue at a robust pace until 2025, as the format moves from film and film projection into television. Already, the number of 4K-enabled television sets sold is rising now that prices have fallen and broadcasters such as Direct TV, which has one 4K channel on its satellite network, begin to adapt. Netflix and YouTube are slowly increasing their 4K content. Amazon Studios is shooting original programs in 4K as well. Meanwhile, several sports networks in Canada have also begun to broadcast 4K content. This means that Ambarella’s best growth is still in the future, as 4K expands into home electronics with content from cellphones, live feeds, and streaming services.