Why Ambarella Inc. Could Be a Good Fit for Intel Custom Foundry

Before you go, we thought you'd like these...
Before you go close icon

Intel is known for having some of the world's most advanced chip manufacturing technology. Until recently, it has kept this technology to itself, using it to build its own PC and server chips. However, over the last year or so, Intel has become much more willing to enter the contract chip manufacturing business.

That being said, Intel has made clear that it doesn't want to run a general purpose foundry, but instead wants to selectively take on customers -- specifically those willing to pay for the value Intel believes it brings to the table with its technology.

I think one such candidate might be the company that designs the main chip inside of GoPro cameras, Ambarella .

Ambarella is a high gross margin, performance-sensitive company
From what I can tell, the characteristics of a good foundry customer for Intel are the following:

  • High gross margin profile
  • Performance/power sensitive
  • Fairly low volumes

Ambarella certainly seems to fit the bill. The company's gross margin profile has been consistently above 60%, and management has been open about trying to transition to the latest-and-greatest manufacturing technologies.

In fact, during a number of Ambarella's recent earnings conference calls, management has signaled that the company has begun work on chips that will be built on 14-nanometer technology, which suggests Ambarella derives value from using leading-edge chip manufacturing technology.

Finally, since Intel Custom Foundry is still fairly new, I expect lower-volume customers will be the name of the game early on, with higher-volume customers coming in as Intel proves this operation. Ambarella's cost of goods sold totaled approximately $57 million during fiscal 2014, with a large chunk of that likely going to the company's chip manufacturing partner, Samsung Electronics , which I would say is relatively low volume as far as foundry clients go.

In other words, I think this could be a really good match.

Would Intel aggressively go after this business?
Getting a chipmaker like Ambarella to desert its current manufacturing partner for a new collaboration obviously requires significant technical effort for all involved. Ambarella would need to work closely with Intel to move its chip designs to Intel's technology. To make the transition less painful, Intel would probably need to dedicate serious engineering resources to help Ambarella make the switch.

The question, then, is whether Intel would even be interested.

The Ambarella opportunity is more or less a rounding error for Intel, financially. However, such a deal would enable Intel to gain exposure to some adjacent businesses that it doesn't current play in (it's unlikely that Intel would be interested in directly competing with Ambarella). It would also put revenue in Intel's pockets that thus would not go to its competitors.

Foolish takeaway
At this time, few Intel foundry customers have been announced. However, Intel management seems to think this is a business worth investing in over the long term. This, at least to me, means the company is in some serious discussions with a number of potential customers.

I think Ambarella could be a very interesting fit for Intel's foundry ambitions, but only time will tell if such a hookup actually materializes.

Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here!

The article Why Ambarella Inc. Could Be a Good Fit for Intel Custom Foundry originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Ambarella and Intel. The Motley Fool owns shares of Ambarella and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

People are Reading