It’s been a difficult few years for Ambarella (NASDAQ:AMBA). AMBA stock was one of 2015’s biggest success stories. Between 2013 and 2015, AMBA stock went practically straight up, jumping from $15 to as much as $125.
AMBA stock rode a huge wave of interest in action cameras. Every one of GoPro’s (NASDAQ:GPRO) milestones sparked more interest in its key chip supplier, Ambarella. As we know, however, GoPro’s boom went to bust as cheaper competition flooded the market, and Ambarella stock plunged in sympathy.
Now, almost four years later, AMBA stock trades at just a third of the value that it had during that shining moment in 2015. AMBA hasn’t given up, by any means. However, the transition from being a consumer-products play to a broader computer-vision stock has been messy, to say the least. Will Ambarella and Ambarella stock be able to get back on track in coming quarters?
Declining Consumer Revenues
As Ambarella CEO Fermi Wang pus it, the company needs to transform “from a pure video processing company to a computer vision company.” It’s not hard to see why Dr. Wang views this as a top priority. Just look at the company’s holiday-quarter results.
In its quarter that ended on Jan. 31, total revenues plunged nearly 30% year-over-year from $71 million to just $51 million. In fiscal 2018, revenues declined an equally jarring 23%. The company refers to its consumer-electronics business as “legacy,” but unfortunately, the sector’s revenues still make up a huge portion of the company’s overall sales.
Ambarella’s sales of chips for next-gen products such as automotive cameras rose at a single-digit percentage rate, which didn’t nearly offset the fall in the sales of chips used in drones, action cameras, security monitoring and other such relatively well-established consumer products.
AMBA’s guidance was also lousy, as the company predicted that its chips for consumer products would keep slumping, while its automotive business’ revenue would be roughly flat . Even its chips for security products are poised to struggle in Q1, due to soft Chinese demand.
As we saw with GoPro, Fitbit (NYSE:FIT) and numerous others, it’s a challenge for hardware companies to maintain their leading market share. Unless you have a fantastic brand, cheaper knockoffs will take most of the market share. And, by and large, while Ambarella may have the best chips, “good enough” alternatives from competing companies are often used by the makers of cheaper products. That’s why Ambarella’s push into computer vision is so important.
AMBA Stock: What Could Turn the Tide
AMBA spends about $30 million dollars per quarter, well over $100 million annually, on R&D. That’s a very impressive sum, amounting to over a third of revenues and almost 10% of the market cap of AMBA stock annually.
That sort of spending is necessary to stay ahead of the competition and develop next-generation products. AMBA is clearly making an all-out effort to build new product lines as its revenues from consumer-products makers fade.
Ambarella is targeting two particularly promising markets. One of these is cameras that enable cars to “see;” those are necessary for any sort of self-driving vehicle. Although Ambarella already sells many chips for dash cams, chips for self-driving cars’ cameras would be a much broader addressable market. Additionally, AMBA has launched various initiatives in the still-formative-but-potentially-huge- Internet-of-Things space.
On top of that, Ambarella has a pristine balance sheet. The company has more than $10 per share in cash and almost no meaningful liabilities. That gives the company a ton of time to develop its new product lines. While the company is not profitable at the moment, it is not facing a cash crunch either.
AMBA Stock: Other Headwinds
Not all the news is positive for Ambarella stock, though. One big risk posed by AMBA stock is that AMBA can be meaningfully hurt by a trade war. In FY18, AMBA earned nearly 80% of its revenue from Asia, though that includes a lot of sales to countries other than China.
Still, as GoPro has accounted for a lower portion of Ambarella’s sales, China is picking up the slack. GoPro only accounted for 12% of AMBA’s revenues as of its last 10-K, and that suggests a good deal of its revenue will be vulnerable if the tariff battles continue. Additionally, 72% of Ambarella’s workforce is located in Asia, and most of those employees are based in Taiwan and China.
Switching gears, while the company has a fantastic balance sheet, its operating results have been rather disappointing. There is no getting around the fact that AMBA is no longer profitable and is struggling to even generate positive EBITDA. With its revenues from consumer-product makers set to fall for at least the next two to three years and no clear sign of when other revenue streams will pick up the pace, AMBA stock could be dead money for quite awhile.
The Verdict on Ambarella Stock
Ambarella has a smart management team that has delivered in the past. Anyone who bought AMBA stock during its IPO is still up big, despite the disappointing performance of Ambarella stock in recent years. With a strong balance sheet and plenty of innovative R&D under way, Ambarella certainly has a good chance of turning things around.
But that doesn’t mean that Ambarella stock is guaranteed to do much of anything in 2019. It seems likely that the company’s revenues will fall further this year and that it will continue posting losses.
Until the company shows stabilization, let alone returns to generating growth and profits, it’s hard to imagine that AMBA stock will rise much. AMBA is setting up to be a 2020 story, so there’s no need to rush out to buy Ambarella stock today.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.