By James Cooke, Kathy Davey, Dylan Griffiths, & Chantal Marx
Founded in 2004, and listed in 2012, Ambarella is a fabless semi-conductor design company. Its focus is on low-power high-definition image processors. The firm has had a couple of historical large order cycles from the chips driving action cameras (GoPro Hero - representing 40% of quarterly sales at peak in 2016), dash cams (Garmin), and Drone technology (DJI and Parrot). Current sales mostly come from security cameras and relatively simple chips for basic self-driving support: lane detection and cruise control monitoring. Within front facing crash detection, their main competitor is Mobileye, which holds a 60% market share.
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While the current product set is largely commoditised and reflects cyclicality in the high-end automotive market, Ambarella is very well positioned with its new generation AI chip CV3 for self-driving vehicles to dominate this industry.
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Major order announcements are anticipated over the next year, with meaningful revenue to begin being generated from these from 2027 onwards. This would result in a substantial step change in revenue and margins.
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While not our base case, there is also a small possibility that this latest generation CV3 chip becomes used for more generalised generative AI, where Ambarella claims it has demonstrated higher energy efficiency than the incumbents.
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The group has a strong balance sheet and is in a net cash position, but the company is currently unprofitable.
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The expectation is that research and development should fall as a percentage of revenue as sales of the more advanced chips begin to ramp up. This will result in improved profitability and free cash flow.
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While execution risk is prevalent, we see strong upside potential in the share price longer term. Consensus is positive on the stock with most analysts carrying a buy-recommendation and a consensus target price suggesting 70% upside from current levels.
Samsung (005930 KS)
Samsung operates four business divisions: Consumer Electronics (CE), Information Technology & Mobile Communications (IM), Device Solutions (DS), and Harman. CE includes traditional electronics and IM includes mobile phones and computers. DS includes semiconductors and display, while Harman includes connected car systems, audio and visual products, and connected services
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Samsung is a global leader in smartphones and semiconductor memory and is set to benefit from a cyclical recovery in memory pricing and demand off a low base and persistent demand for data centres. Increased demand for data centres is being driven by AI, cloud computing, e-commerce, remote working, and gaming.
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Major order announcements are anticipated over the next year, with meaningful revenue to begin being generated from these from 2027 onwards. This would result in a substantial step change in revenue and margins.
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We expect a new replacement cycle for smartphones where replacement has been slow over the last few years. There is also scope for an improvement in consumer electronics and display panels after recent weakness.
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Although the semiconductor memory market is cyclical, the sector is set to deliver double-digit growth on average over the medium term as new technology products require memory chips to run. The foundry business is particularly well positioned.
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Samsung has a very strong balance sheet with a high net cash position.
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For 4Q23, results were disappointing as robust chip sales and strong quarterly growth in Display was dragged on by a soft performance in Device eXperience (DX), its largest segment by revenue. This was mainly due to softness in smartphone and TV sales.
Samsung is trading on a forward PE of 14 times, which is a larger than normal discount to peers, and in line with its five-year historic rating. The rating is expected to unwind quite quickly (24 months: 10.7 times) because of the cyclical nature of this business and an anticipated recovery of economic conditions through the next year.
Puig (listing pending)
Puig is in the process of listing on the Spanish stock exchange. The company houses 17 'love' brands including Jean Paul Gaultier, Rabanne, Carolina Herrera, and Nina Ricci. The product set covers fragrance, fashion, make-up, and skincare.
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The group has a strong track record of scaling brands that could support market share gains in future. Volume gains will be supportive of margin expansion that will in turn drive profitability.
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The beauty industry is experiencing structural growth and tends to be quite defensive. Puig has, over the last few years, comfortably outperformed the market due to its market positioning in premium fragrance, make-up, and skincare. Puig is also more weighted to beauty than to fashion - with approximately 95% of sales emanating from the former.
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The risk of licence losses has come down - currently over 90% of revenue comes from its owned brand portfolio.
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Free cash flow generation has been strong, allowing for ample room to fund both organic and inorganic growth and return money to shareholders.
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Tesla has seen an uptick in capex (+24% y/y) amid the roll-out of Cybertruck vehicles and the construction of its new factory in Mexico, which has severely impacted free cash flow (-42% y/y). Current capital expenditure as a share of revenue was 9.2%.
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In 2023, the company showed impressive revenue growth of 18.7% and delivered an adjusted EBITDA margin of 20.1%. Management has guided for revenue to grow in the high single-digits medium term (like for like), and for margins to remain stable in 2024 but to expand thereafter. The company plans to pay out 40% of reported net profit in dividends.
The company is expected to fetch a market cap of over €14 billion but a successful debut could push the valuation considerably above this level in the first few weeks of trading. We like the company from a quality and growth perspective and would be comfortable to be long-term holders of the company should the valuation not get too far ahead of itself.
Wise (WISE LN)
Fintech company, Wise, was launched in 2011 and listed on the London Stock Exchange in 2021. It was created to make international money transfers cheaper, faster, and more transparent. The idea for Wise emerged when two men from Estonia had different currency needs. One was paid in euros but lived in London and the other was paid in pounds but needed euros to pay off a mortgage in Estonia. They were both frustrated by the cost of transfers and poor exchange rates achieved. This prompted the formation of Wise, which has built a replacement infrastructure to facilitate cross-border payments, reducing the need for costly intermediaries.
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Wise is a leading player in the large and growing cross-border payments market. The addressable market for cross-border payments is large and continues to expand at a steady rate.
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The company offers an alternative to traditional currency transfers run on outdated infrastructure that are costly and slow. Wise's currency transfers are low cost, fast, and its pricing is transparent.
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Wise's compelling offer has seen it grow well since its launch and take market share from banks, where most currency transfers are performed. It has done this through building its own infrastructure and acquiring regulatory licences in many countries worldwide, creating a footprint that will be difficult to replicate.
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This type of model would take a long time to replicate as it takes a long time and a lot of work to get the licences as described above.
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The company's other offerings complement the currency transfer business and allow for a more 'sticky' client base.
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Earnings per share is expected to have grown strongly in FY24 (year end March), whereafter growth is expected to flatten as more interest income gets paid out to customers and interest rates come down. The underlying business is expected to continue to grow customer numbers.
Wise operates globally, however, it is mainly available in developed markets. Wise estimates that it has a 5% market share in personal transfers and less than 1% in small-medium size businesses (SMBs). This means there is still ample opportunity to gain market share.
Earnings expectations and target price momentum is positive. And the company is trading on a forward PE of 23.1, which is a significant discount it's two-year average forward PE of 39 times.
Alibaba (BABA US)
Alibaba is a Chinese-based technology conglomerate specialising in e-commerce, online financial services, internet infrastructure, and internet content services.
Summary Investment Case
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The company has grown into a commercial giant, having already revolutionised the Chinese retail market, and now aims to become an integral part of the global digital economy.
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An enormous customer base as well as an ever-expanding product portfolio make it a formidable player in the e-commerce space, both in China and internationally.
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The digital businesses have a substantial addressable market - China remains one of the largest countries in the world by population and boasts an internet penetration rate of more than 75%. More specifically, the cloud business is expected to maintain support from AI-related demand, and this remains one of the group's strongest conviction points.
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While the market has been less than enthused on the Chinese economy post its reopening at the start of last year, economists still expect a further recovery in Chinese GDP growth, which is encouraging for all the businesses within the group.
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China's regulatory environment encompassing internet companies appears to be easing due to pressure on the state regarding tepid economic growth, although this remains a risk.
The group has restructured its business into six stand-alone entities but recently decided to hold off on a possible spin-off of its cloud business. In any event, we think post-restructuring, eventually each individual business is likely to attract a more appropriate valuation based on a more specific growth outlook.
Alibaba's share price has stabilised more recently but is still trading well below pre-Covid levels. The stock is trading on a forward PE of 8.5 times, which is quite attractive compared to its long-term historical average and implies a significant discount relative to its peers. Most sell-side analysts are still positive on the stock, with the consensus target price remaining well above the current share price.
