You DARE to come to me for a heart, do you? You clinking, clanking, clattering collection of caligenous junk! – Wizard of Oz
I’m headed to speak a hedge fund conference hosted by the terrific value investor, Vitaly Katsenelson https://twitter.com/vitaliyk in Vail. I’m gonna give a talk about some of this very stuff.
Drones, Robots and Wearables, oh my! That’s likely to be one of my primary Revolution Investing mantras for the next few years. Drones, driverless cars and other unmanned, sensor- and software-controlled vehicles are so much safer and cost efficient than human-driven vehicles that the disruption of all routine deliveries and shuttling is inevitable over the next five to ten years. Robots that patrol, report, track, and otherwise provide real-life services are also inevitable for the same reasons – they’re safer and more cost efficient than human patrols and trackers.
I’ve got two new stock picks for the Drone/Robotics/Wearables Revolution basket that we’ve so far kicked off with small long-term investments in INVN and JDSU.
First up is IXYS. We’re talking about a company that supplies power controllers and other power chipsets that every robot, drone and wearable sold will need. The common denominator of all electronic devices, drones and robots is that they need power. Controlling that power efficiently is obviously going to be a huge factor in making drones, robots and wearables cheap enough to operate in a power-starved world. Solar-powered units that don’t need recharging still need power chips.
The company’s growing its top line at 15% per year and earnings growth will be much bigger than that if management executes. IXYS is currently valued at less than 1x sales and is seeing huge demand from industrial power and comunciations markets. Near-term, regardless of the oncoming Drone/Robot/Wearables Revolution, this company should have a decent growth spurt teed up from the expansion of power and communication infrastruture. With $3 per share in net cash as well as $0 debt, its enterprise value/sales ratio is .60. This is 1/3 to 1/4 of the enterprise value/sales ratio of the industry, as many power semi cos trade for 1.5-2.5 sales and the private market for all of these companies has been at least 2-3x’s revenues. A .6 enterprise value/sales ratio is stupid cheap. The company should report at least a $1 per share in earnings next year, giving it a 10 forward price to earnings ratio.
If IXYS hits a 15% operating margin target and revenue growth spurt is 10-15% as the company has targeted for the near-term, we’re looking at up to $2 per share in earnings in two to three years.
I first highlighted IXYS a couple years ago when I turned from long-time alt-energy bear to bull as the market finally bottomed about the same time I published my book “100 Stocks for the Clean Tech Revolution” and it’s time to step in and start scaling into a long-term Revolution Investing position in this name. I’m going to start with about a 1/3 of a full position in common stock in this name. Will be adding to it in coming days and weeks and will let you know each and every time I do.
Next up is a much more “expensive” stock, at least by the metrics I just laid out for IXYS, although the topline growth is much more impressive too. Ambarella AMBA makes chipsets and software that record and transmit/upload HD video. The company’s system-on-a-chip designs integrated HD video, image, and audio processing onto a single chip for delivering video and image quality, differentiated functionality and…yes, they also cite the importance of how their chips provide low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, Internet Protocol (IP) security cameras, and camcorders in the camera market; and manage IP video traffic and broadcasting in the cloud itself.
AMBA is trading at 4x sales and at at 25x forward P/E. With topline growth of 20-30% per year for the last few and for the next few years, I’m willing to pay up a bit for this name as video capture and sharing is likely to become a bigger part of just about every connected device we use and own. The company does have nearly $7 per share in net cash, which brings the enterprise value / sales figure down to about 3x. That $7 per share in net cash gives them financial flexibility as does the cash flow that they spin off each quarter, but it’s not much of a cushion when you’re buying the stock at $28 per share as we are. Frankly, it’s a long way down to “cheap” if the company doesn’t deliver more topline growth in coming years and over the next decade at least.
I wouldn’t be surprised to see this company get taken out at some point by a larger chip company, but I’m not buying it for that reason. I do think it is time to go ahead and start scaling into a long position in this name too and I’m adding it to the Revolution Investing Drone/Robotics/Wearables basket. And on AMBA too then, I’m going to start with about a 1/3 of a full position in common stock in this name. Will be adding to it in coming days and weeks and will let you know each and every time I do.
Why, anybody can have a brain. That’s a very mediocre commodity. Every pusillanimous creature that crawls on the Earth or slinks through slimy seas has a brain. Back where I come from, we have universities, seats of great learning, where men go to become great thinkers. And when they come out, they think deep thoughts and with no more brains than you have. But they have one thing you haven’t got: a diploma. – Wizard of Oz