Even though the days of Ambarella Inc (NASDAQ:AMBA) trading at triple-digit price-earnings multiples are over, the company is still in the early days of a business transition. By pivoting away from supplying key parts to GoPro, Inc. (NASDAQ:GPRO) to designing the “computer vision” chip (or “CV1”) for the automotive computing market, Ambarella has the potential for explosive growth. It just needs patient shareholders to wait for CV1 to get in production.
Ambarella’s revenue from GoPro peaked two years ago in fiscal year 2016 when its contribution to revenue totaled $96 million. That year, non-GoPro revenue was $220 million, while non-generally accepted accounting principles EBIT peaked at 37 percent. Without the hype of GoPro, the fading fad of the action camera-maker forced Ambarella to target other markets.
Ambarella’s non-GoPro revenue continues to grow but the EBIT margin is falling. In FY 2018, that margin fell to 28 percent, levels not seen since the FY 2014/15 years as revenue.
Ambarella stock is stuck in a range at this time as customers continue sampling of the CV1 system on a chip (SoC). The company has a product path as it plans for CV2 and CV22 production at 10 nm next. For now, management may only forecast the market potential for the CV solution. By 2022, the market for such chips in the automotive market is $4.1 billion. For security cameras, the addressable market is $1.1 billion. Almost like a footnote, the market for virtual reality and for drones is $100 million each.
Growth in Security Cameras
Video cameras in the security market will demand low-powered solutions that may compress and efficiently store and transport video data. CV meets those needs, so once it is launched, the company’s expectations for revenue growth in this sector is reasonable. The solution, in a nutshell, contextualizes videos in real time. For this reason, CV has multiple use cases in the autonomous driving market.
With the hype of promised growth, why did Ambarella stock fall, lately? An automobile on an autonomous driving mode that crashed put into question the safety of advanced driver-assistance systems (ADAS). Tesla, Inc. (NASDAQ:TSLA) stock fell after investors worried about ADAS in recent days. NVIDIA Corporation (NASDAQ:NVDA) suspended ADAS driving tests by switching from real-world to simulated environments.
The potential slowdown in ADAS R&D heightens risks for Ambarella stock. CV’s launch could come at a time when the addressable market is starting to shrink. Still, Ambarella has an extensive relationship with many car companies, including Nissan, Toyota Motor Corporation (NYSE:TM), and Honda Motor Co Ltd (NYSE:HMC).
What is CV?
Computer Vision compresses video and images like any other solution out there on the market. But the chip has stereo camera perception. Through depth sensors like light detection and ranging (LIDAR), radar, and ultrasonic, it perceives obstacles, terrain, curb and barrier detection and visualizes odometry.
The monocular camera perception may classify such objects as vehicles, motorcycles or pedestrians. So instead of processing the outside world with central processing units (CPUs), graphics processing units (GPUs), and digital signal processors (DSPs), the program model uses deep model frameworks to make the interpretation.
Ambarella Stock Valuation
At a recent price of around $49, Ambarella trades at a forward P/E of 25 times. This is not an expensive valuation for the stock, given its growth potential. Yet if the company faces any delays in CV development or the market demand changes while Ambarella is still in its development phase, the stock could correct badly.
In the fourth quarter, the company reported on March 1 a 19.3 percent year-over-year revenue drop. Its guidance was equally downbeat: Revenue will be in the range of $54.5 million to $57.5 million, below Wall Street’s consensus.
Takeaway on Ambarella Stock
Ambarella is probably a few months away from deciding on a launch of CV in the second half of this year. Customer testing started in the fourth quarter and in the current period. Early indications that the majority of customers want a finished product sooner will justify AMBA stock shooting higher.
Disclosure: Author does not own shares in any of the stocks mentioned.