Ambarella Inc (NASDAQ:AMBA) [Trend Analysis] has been in the vision of many investors lately having risen over 200% in the last year. So is it too late for investors to get in this, that is, is AMBA overpriced?
Price to Earnings
Ambarella (NASDAQ:AMBA) according to Zacks is trading on a forward price to earnings multiple of a whopping 41.6. With the market trading on an average forward Price to Earnings multiple of approximately 19, it is easy to see on this basis how overpriced the stock has become. For those investors who will look at it and say this only considers one earnings period ahead and there is more growth for AMBA in the coming years ahead that should be recognized, we analyze this below.
After constant upward revisions in earnings for Ambarella, growth is being revised upwards for this company. Zacks has estimated growth per year for the next 5 years of 22.5% for AMBA. The best way to assess if the stock is well priced from a longer term growth perspective is to use the price to earnings to growth (PEG) ratio. Using the forward PE above and the 5 year growth results in a PEG ratio of 1.85 for Ambarella. The general rule of thumb is if a PEG is under 1, a stock is deemed overpriced and if between 1 and 2, it is fairly priced. So from a longer term growth perspective AMBA appears fairly priced.
There are many other semi conductor manufacturers out there and based on the above it means there certainly are better alternatives in regard to pricing. These include:
Avago Technologies (NASDAQ:AVGO) – trading on a PEG ratio of 0.94
Cirrus Logic (NASDAQ:CRUS) – trading on a PEG ratio of 0.83.
Of course some investors may think the growth prospects for Ambarella Inc (NASDAQ:AMBA) are higher than analyst consensus estimates and that the company is a safer bet than others. But it is certainly worth considering alternatives at current pricing.