Investors could hardly fault themselves for bidding shares of Ambarella, Inc. NASDAQ:AMBA) higher last month. Despite very weak results from the video technology maker, AMBA stock investors are betting that the setback is only temporary.
Last quarter, revenue growth slowed, so it’s now up to the company to prove that it will thrive in the new markets it creates.
For the second quarter, Ambarella reported revenue grew just 10% year-over-year. When the company excludes its business with GoPro Inc (NASDAQ:GPRO), the revenue growth jumps to 16.3%. Management believes it will accelerate growth by focusing on the OEM automotive market and, in particular, the automotive video recorder business. Within the ultra-HD cameras in cars — part of advanced driver-assistance systems, or ADAS — Ambarella is developing computer vision to differentiate its solution from the competitors.
Computer vision (“CV”) technology has use cases that extend beyond automotive. Drones and security cameras are other potential markets. In ADAS, CV will enable cameras to identify objects, recognize people, and classify objects.
Ambarella started development of CV chips four years ago. Fundamentally, the chip demand parallel computing, so the release of CPUs from Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) will only push developers to write solutions that fully benefit from more processor cores. CV1 utilizes deep learning algorithms. In practical terms, the chip will detect obstacles and make use of terrain mapping data. Ambarella recently began developing two more 10-nanometer CV chips. Management said one of those chips will target the automotive OEM market.
Early Drone Wins
Thanks to the camera makers in the U.S. and Europe adopting to HEVC video standard, Ambarella’s design wins for S3L HEVC SOC and the S5L family suggests more customers and more business ahead. In the drone market, suppliers adopted Ambarella’s camera solution in their product. Unfortunately, weak demand for drones and falling prices are the near-term headwinds that putting a cap on sales. Ambarella forecast sales to the drone market will fall in the next quarter. It blamed DJI’s lower pricing for the Spark drone and continued weakness of Tier 2 customers for reasons for the downbeat outlook.
Conversely, growth in the IP security market led to around a 29% revenue increase. Home monitoring is a growing trend driving demand. China and North America were two strong markets that gave Ambarella a positive lift in the quarter.
While the overall impact of the weak drone market is a drop in revenue in the range of 3% to 7% for the full fiscal year. But a slower expected growth forecast for the virtual reality is taking a toll on Ambarella’s outlook for the year.
Due to component shortages, such as memory components, the company’s customers will not need as many Ambarella chips.As much as it does not want to rely on GoPro, new product launches will lead to higher revenue from GoPro. Investors may infer that ongoing strength from GoPro and the eventual resolution of a parts shortage will lead to a rebound in sales after this fiscal year.
AMBA Stock’s Fortunes Ties to ADAS Growth
Ambarella’s CV products are the kind of product that suits the needs of computing in the automotive market. As car companies increase the sophistication of chips every year, Ambarella’s potential market in this segment will go up, too. Management did not raise operating expenses to speed up development of CV but it may do so in the next few quarters.
This will put pressure on the profit margin but improves its positioning in the ADAS market. Short-term pain for long-term gains, as the saying goes. On the November quarterly earnings conference call, investors will listen carefully for Ambarella raising its R&D and operating expenses.
This could lead to a disappointment for investors as earnings fall, creating another buying opportunity, should AMBA stock’s price fall.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.