Ambarella: Intriguing, As We Have Been Here Before
Contributor since 2011 / 26386 Followers
Summary:
- Ambarella has severely disappointed investors in recent years as investments into R&D and new products did not result in tangible results.
- Recent trends reveal that these investments might be paying off, yet the company continues to post substantial losses.
- Awaiting Q3 results, I remain skeptical due to high stock-based compensation expenses and demanding sales multiples, although the potential still lures.
Gary Yeowell
In the spring, I believed that Ambarella (NASDAQ:AMBA) was a better talker than a performer. Despite investments into – and talk about AI – the company has only seen growing losses in recent years.
Following a very rough fiscal year 2024, investors were asked to take a leap of faith into a rosier future, with few tangible results to show for it yet. These incremental improvements in the results are arriving in recent quarters, although the company has a long way to go to achieve sustainable profits.
Digital Video Applications
Founded in 2004, Ambarella has focused on development of digital video applications, believing that video is a unique kind of data, requiring optimized chip architecture.
Just a $6 stock when the company went public in 2012, Ambarella was a $100 million business in fact, quite a profitable business at the time. The company focuses on human viewing application which require a combination of low-power and high-resolutions, but over time the investments and R&D budget shifted towards AI applications.
This resulted in the development of a deep neural network AI inference processor, which combined with computer vision drives decision-making and automation opportunities. Many of these applications are seen in the automotive market, expected to take market share away from traditional IOT applications, which Ambarella has served to date.
A Bust
A $6 stock rallied to the $100 mark in 2015 and even rose to a high at $200 per share in 2021, amidst dazzling momentum around the AI investments (and their expected payoffs). These moves did not coincide with the fundamental performance as a $300 million business in the years 2016-2018 was solidly profitable, yet revenues fell to a $200-$300 million range ever since, with (substantial) losses being reported.
Even worse, early in 2024, the company posted absolutely dismal fiscal 2024 results. Revenues for the year were down a third to $226 million, with the R&D budget nearing the topline sales numbers reported. Operating losses of $155 million were huge, and even worse, there was no quick avail in sight. After all, fourth quarter sales were reported at just $51 million, with operating losses posted at $41 million.
One of the few bright spots was that first quarter fiscal 2025 sales were seen up (sequentially) to $52-$56 million, driven by AI contribution and an ending of inventory de-stocking trends. Trading at $50 per share, the company was granted a $1.8 billion operating asset valuation, still equal to 8 times annualised sales.
While management sounded upbeat, touting a growth story to arrive in the coming years, investors have heard this story multiple times already, with no tangible results seen, even as prevailing end markets and AI market were in solid shape. This left me very cautious, and frankly not keen to take a position in this battleground stock.
Range Bound
Since the spring, shares of the company have traded in a $40-$65 range, now having moved up to the higher end of the range in the low-sixties. This relative period of stability has been backed up by incremental improvements in the business.
In May, Ambarella posted a 12% fall in first quarter sales to $54.5 million, with operating losses reported at $39.5 million. Somewhat comforting is that the company guided for second quarter sales to improve to $60-$64 million, marking solid sequential improvements, badly needed, of course.
In August, second quarter sales were reported at $63.7 million, which meant that revenues came in at the higher end of the guided range, as sales were up 3% on an annual basis. Despite these improvements, GAAP operating losses were substantial, at $36.3 million. The real comforting actor was that momentum was set to accelerate, with third quarter sales seen up to $77-$81 million.
The company guided for non-GAAP operating performance around the break-even line in the third quarter, comparing to a $5.5 million loss on this metric in the second quarter. Virtually the entire gap with GAAP earnings is due to stock-based compensation expenses, suggesting that third quarter GAAP operating losses are seen around $30 million in all likelihood.
And Now?
Amidst real momentum, the 41 million shares of Ambarella are now valued at $2.5 billion at $61 per share. This valuation includes a current net cash position of around $220 million, as a $2.3 billion operating asset valuation implies that assets are valued at 7–8 times annualised sales based on the guidance for the third quarter.
The reality is that after many quarters and in fact years of anticipated growth, some real momentum is displayed here, but we will only see this confirmed later this month when Ambarella is due to post its third quarter results.
I am quite pleased to see the accelerating momentum in the guidance, but even in this case the company continues to see large realistic losses. While adjusted metrics are seen around break-even, GAAP losses are huge and real amidst elevated stock-based compensation expenses.
Amidst all this, I am pleased to see these developments, with growth moreover driven by new products in which the company has invested a lot, yet the fundamental picture remains a bit challenged as well. Despite the promise of a sound positioning, Ambarella has seen multiple occasions of accelerating momentum in the past, which looked very promising. In most cases, that did not last, as the company did not follow through on it sufficiently.
It is this track record, the fact that losses are still substantial, with sales multiples still being demanding, which makes me cautious. Hence, I look forward with great interest to the third quarter results (and outlook for the final quarter).
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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