Forget Snap Inc, Here Is a Better "Camera Company" for Your Portfolio

By Frank DiPietro Markets Fool.com

Amid significant buzz, Snap(NYSE: SNAP)made its public market debut last week to much fanfare.Referring to the various SEC filings, you will find that the company describes itself in this manner:

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Snap Inc. is a camera company.

This statement refers to its Spectacles. Released in Nov. 2016, these sunglasses are equipped with a camera, allowing people to record up to 30 seconds of video and upload that content to Snapchat. Snap generates revenue by selling advertising on its mobile app, and in 2016, logged revenue of $404.5 million.

Image source: Snap.

However, inside the unique sunglasses is a chip that powers the camera. That system-on-chip, or SoC, is made by Ambarella(NASDAQ: AMBA).

Hype and scarcity of shares in an IPO

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Snap priced its initial public offering above the range. From the original $17 per share offer price, the stock quickly went on to gain nearly 60% over two days of trading to close out the week with a market cap over $30 billion.

As is the case with most companies, Snap only made available a portion of its total shares to investors in the offering -- about 20% of shares outstanding. With the hype surrounding the company, scarcity becomes a powerful force.Many investors who were unable to buy in at the initial offering price scooped up their positions once the shares began trading publicly. This pent-up demand often explains the bullish gains a new stock will enjoy after the shares begin trading -- Snap was no different as its stock price increased 44% on the first day.

But are investors wise to clamor over each other for a piece of this company? At its current valuation, the company trades at over 80 times its 2016 sales! Before you accept the need to pay this kind of premium, there is another "camera company" to consider.

Trade the hype for real results

And that brings us to Ambarella. Instead of focusing on the bright shiny object that Wall Street is chasing, turn your attention to the chip supplier for a variety of camera-based products.

Ambarella went public in Oct. 2012andhas a market cap of about $2 billion. The company has over 650 employees who design and market SoCs for camera-related products.

These SoCs can be found in a wide variety of popular consumer products we know and love, includingGoPro action sports cameras,DJI drones, SimpliSafe home security products, Mercedes Benzauto incident recording devices, and of course, Snap Spectacles.

There are three compelling reasons why Ambarella chips are winning so many design slots. They have low power requirements (good for battery-powered products), they work under low ambient light (for better image quality), and they offer highly efficient video compression (for faster, easier video uploads).

The company's balance sheet is pristine with $323 million in cash and cash equivalents and no long-term debt. In fiscal 2017, the company earned $2.92 per share on a non-GAAP basis for the year ended Jan. 31.

Metric Snap Ambarella
Revenue $404 million $310 million
Non-GAAP earning per share ($0.53) $2.92
Company valuation $31.3 billion $1.8 billion
Price to sales ~80 times 5.8 times

Data source Ambarella and Snap. Chart by author.

The bottom line

Even more telling is the fact that Snap is not yet profitable, generating a loss of $514.6 million in 2016.

The significnat spending the company will have to maintain in order to attract new users and fight off competition from existing social media giants is daunting. Snap has already committed to a 5-year, $2 billion contract with Alphabetfor cloud infrastructure, and that is on top of another $1 billion agreement with Amazon. Investors will have to carefully gauge whether the company can grow its revenue, make these investments, and eventually turn a profit.

On the other hand, Ambarella is already a key supplier to a wide range of customers and has a proven technology and stream of earnings. It has nearly $10 per share in cash on its balance sheet and is selling at a multiple to earnings (less cash) of just 15 times.

So before you pony up for the Snap premium, pay attention to related companies like Ambarella with the track record and attractive valuation that may better serve your portfolio.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Frank DiPietro owns shares of Amazon and Ambarella. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Ambarella. The Motley Fool has a disclosure policy.