After Ambarella (NASDAQ:AMBA) posted quarterly results, the stock tanked by around $5 at the open. The weak near-term outlook and the quarterly loss of $0.21 a share should concern investors. Despite the promise of CV, or computer vision, Ambarella is still a “show me” company.
Ambarella lost $0.21 a share, or $6.9 million, compared to $0.10, or $3.3 million, in profits last year. Revenue fell from $71.6 million to $62.5 million. The loss and the weak outlook is hardly a surprise.
The company is in a multiyear time frame for distancing its business from GoPro (NASDAQ:GPRO) and pivoting toward growth markets. This includes IoT home-monitoring cameras, automotive markets, ADAS, IP security and more.
Yet the “pivot” is fraught with risks. The company may have the technical expertise to deliver a superior camera and stereo product that stands out against Chinese competitors, but AMBA stock, even at the $35-$40 level, is too expensive.
Investors need to demand a deeper discount on AMBA stock before buying it. Either the stock must fall, or Ambarella needs to deliver growth sooner. Currently, ANAFI, a consumer drone, uses Ambarella’s H22 SoC, giving the product 4K HDR, 180-degree tilt, and lossless zoom. Although drone sales are weakening, the introduction of less expensive models may spur demand.
In the ADAS and automotive market, the company’s CV2 and CV22 are under 10-nanometer production.
Weak Holiday Outlook
Ambarella already forecasts weak demand for drones and consumer products, leading the company to estimate non-GAAP gross margins falling to between 59-60.5%, down from 61.4% in the reported second quarter. OpEx will also rise, due to the hiring of additional engineers.
Ambarella simply has less business to capture in the new markets compared to the golden days of GoPro action cameras once being a must-have product.
Ignoring the valuations, investors could bet that the rebound in AMBA stock is underway. If manufacturers adapt CV2 and CV22 and demand strengthens, then the reacceleration in revenue would justify holding this stock.
Shaking off the negativity in Ambarella’s outlook would require believing that the slowdown in automotive and consumer cameras is only temporary. But if consumers are holding off on buying expensive goods and if a trade war slows the economy, Ambarella’s recovery will take even longer than two quarters.
Management said the company is not feeling an impact on tariffs but that it is monitoring the situation closely. Although China would be expected to shift its supply to domestic producers, the company said it is not seeing that just yet.
Ambarella expects revenue from CV to trickle in through sales of the IP security camera, starting in the first half of 2019. It has multiple design wins serving many professional IP security camera customers.
In the second half and the full year, this market will contribute to around 60% of the company’s revenue. On the automotive side, a delay from a customer in Japan led to a forecast drop in this segment.
Intel Is the Real Competitor
Ambarella does not see Nvidia (NASDAQ:NVDA) as a competitor. Rather, Intel (NASDAQ:INTC), through Mobileye, is a direct threat. CEO Fermi Wang stated:
“And I also want to add another point, which is in the front camera ADAS category, where Nvidia is not now there, I think our main competitor is really Mobileye. And in fact, in order to accelerate the time to market, we kind of focus on customer and partners that are developing their own algorithms.”
More Headwinds
Wearables are also causing a decline in Ambarella’s second half of the year. This view is consistent with expectations that Fitbit (NASDAQ:FIT) faces lower demand overall.
That is why the wearables specialist needs to keep introducing new models to drive demand higher. Most recently, Fitbit released a Charge 3, a wearable device that has smartphone-like capabilities.
Bottom Line on AMBA Stock
Ambarella’s uncertainties justify a further drop in its share price. At best, AMBA stock may trade in a range as markets wait for sales to grow again. That wait could be a long one.
