Canaccord Genuity’s Mike Ramsay released a report Tuesday morning on his thoughts about the future of Ambarella Inc. (NASDAQ: AMBA). The direction of the report is that the company has a strong disposition for sales and earnings growth based on its application-specific video encoding microprocessors. This becomes increasingly true as HD and UltraHD video capture and compression become increasingly important across consumer and enterprise markets.

Along with this, the brokerage firm believes that Ambarella’s investments in video analytics will be significantly undervalued and provide sustained long-term differentiation and price stability.

Looking ahead, Canaccord Genuity believes that Ambarella will have sustainable leadership in both video compression and processing power efficiency due to its application-specific video encoding processors. In the long term, the company’s investments in video analytics software and encoding expertise will be incredibly relevant through important applications such as facial and action recognition, security, augmented-reality, self-driving autos and content-aware advertising.

Considering Ambarella’s unique processor and software technologies, the brokerage firm anticipates sustained leading market share in the range of 20% to 25% core growth markets including:

• Action sports cameras, including top customer GoPro Inc. (NASDAQ: GPRO)
• Enterprise video security
• After-market auto cameras
• Video broadcast infrastructure

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It is worth noting that GoPro’s cameras contain Ambarella’s processors. GoPro produces a solid product, which in conjunction with market tailwinds has skyrocketed shares since its initial public offering this past summer. This arguably makes Ambarella that much more valuable because GoPro will speak for the quality of its processors, in turn attracting more clients and more sales for Ambarella. Also, Ambarella is inside the devices of GoPro’s competitors as well.

Canaccord Genuity initiated coverage of Ambarella with a Buy rating set its price target at $66. The price target is based on the shares trading at roughly 25 times the fiscal year 2017 earnings per share estimate. The firm would go on to state that while shares trade at a premium multiple, it believes that the emergence of new growth markets will allow Ambarella’s shares to hold their premium multiple, as well as appreciating consistent with the firm’s sales and earnings growth estimates.

The stock has a consensus analyst price target of $56.22, with an upside of 8.7% to the Canaccord Genuity price target of $66 and with an upside of 27.6% to current prices. The highest analyst price target is $70, which implies an upside of 35.4%.

The brokerage firm has forward-looking estimates for adjusted earnings per share in the coming years as:

• 2015: $1.75, up 60% year-over-year
• 2016: $1.98, up 13%
• 2017: $2.64, up 34%

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Shares of Ambarella were up 2% at $51.71 in the first two hours of trading Tuesday, against a 52-week trading range of $21.60 to $58.00. It has a market cap of roughly $1.5 billion.

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