Chip Shots – INTC, MBLY, AMBA

by Dan March 13, 2017 12:56 pm • Trade Ideas

Since the 1980s, three world changing advances in consumer technology have gotten us to where we are today. Personal computing in the 1980s, the internet in the 1990s and mobile in the 2000s. If you want to read about the convergence of these technologies, there are two great reads here and here).

A more recent game changer is cloud computing, and more importantly, what that could lead to as Big Data gives way to Artificial Intelligence (AI) and machine learning. Obviously, whether cloud computing is the next great leap or just connected computers (and therefore in the category of “internet”) preparing for the real next leap remains to be seen. What eventually makes the Mount Rushmore of Silicon Valley will only matter in history books. What is certain though, is that emerging technologies that were once the stuff of sci-fi novels are constantly becoming a reality and changing our world at a rate unprecedented in history. We can categorize later, if we’re still here.

One particular company, Intel (INTC), helped enable the personal computing revolution in the 1980s and then one of the companies powering the internet explosion of the 1990s. But then they kind of missed the whole mobile transition in the 2000’s.

Now, they look dead set not to miss on the next big things. The company’s 2015 acquisition of Altera for nearly $17 is part of a big push into the internet of things (IoT), one of the eventualities of a connected world. And this morning’s announcement that that they will spend close to $15 billion to purchase the maker of chip-based camera systems for autonomous cars, MobileEye (MBLY) should make it clear, INTC has no plans on missing out as personal computing becomes more about the things around us.

Over the last couple years there has been about $200 billion in m&a in the semiconductor space, most have been the result of pc and mobile phone centric semi companies pivoting. Here is a list of some of that activity:

Qualcomm (QCOM) to Acquire NXP for $47 billion

ARM Holdings (ARMH) of the U.K. agreed to be acquired by Japan’s Softbank for $32 billion.

Analog Devices (ADI) is making a near $15 billion offer to acquire Linear Technology (LLTC)

Western Digital (WDC) paid $16 billion for NAND flash chip maker Sandisk (SNDK)

NXP Semiconductors (NXPI) made a nearly $12 billion bid for Freescale (FSL)

Avago Technologies (AVGO) paid $37 billion ($17b cash & $20b in stock) for Broadcom (BRCM)

Intel (INTC) bought Altera (ALTR) for $17 billion in all cash

The who’s next game is always fun.  Back in late January, we took at look at Skyworks Solutions (SWKS) and we concluded while they are focused on diversifying away from their near 50% revenue reliance on smartphones, we would be surprised if their single digit revenue exposure to emerging technologies like autonomous cars would be enough for a takeout.

One stock that might be worth taking a look at is Ambarella (AMBA), despite their 30% revenue exposure to GoPro (GPRO). The stock is trading up 7% this today on the heels of the MBLY deal as the company makes video compression chips that are an important part for drones and autonomous driving.

A quick aside… In 2016 MBLY booked $358 million in sales, which grew 49% from the prior year, and are expected to grow another 39% this year to $500 million. INTC’s purchase price of ~$15 billion is at a whopping 30x expected sales. To put MBLY’s expected 2017 sales in some context, they are less than 1% of INTC’s expected $60 billion in sales! INTC’s $17 billion bid for Altera in 2015 was about 10x their sales which were growing high single digits. INTC has been anything but shy about making knockout bids.

So back to AMBA. Their trailing 12-month sales were about $310 million… about flat on a year over year basis. (Thanks a lot GoPro.) The company was clearly too levered to the failing camera maker, but with a market capitalization of less than $2 billion, with GAAP earnings of about $1 and trading at a little less than 6x sales, this would be an easy acquisition for no shortage of semiconductor companies.  AMBA has a great balance sheet with $400 million in cash, and no debt. What that means is they could actually be an acquirer before becoming an acquiree!

Investors seem a tad confused at the moment, with the stock trading at very  near the exact mid-point of the one year range between $35 and $75:

AMBA 1yr chart from Bloomberg

Short-dated options prices have collapsed since fiscal Q4 earnings in late February, with 30 day at the money implied volatility at 35%, while May at the money oprtions are only about 36.5%:


 So here is the thing, we are not into chasing stocks up 7% on news unrelated to them. But if you thought there was a good shot that AMBA could be a take-out candidate and that the price could likely be very near their 52-week highs at $75, up about 30%, then you might consider defining your risk with calls or call spreads. For instance with the stock at $56.60 the August 60/75 call spread is offered at about $3.40, with a break-even at $63.40 with a max profit potential of $11.60 if the stock were $75 or higher. That’s not fantastic given how far away the break-even is and how much premium is at risk. Obviously financing a call spread with a put sale, a call spread risk reversal looks more attractive but it also throws out the whole defined risk component to the trade.  We don’t think we are in the sort of market where you want to be sell naked puts in a risky names, but we are also not particularly excited about chasing a potneital deal stock with out of the money premium.  SO the stock looks interesting, just not chasing here, its on our radar.