Ambarella: Edge AI Solutions Offer Long-Term Revenue Growth
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Summary:
- Ambarella is a growing technology company offering its customers differentiated AI-driven edge computing solutions.
- The company covers IoT, automotive and industrial end markets with significant long-term growth opportunities.
- The company’s shares can be purchased around the current price keeping in mind that it’s a long-term game.
delihayat
Ambarella (NASDAQ:AMBA) is a low-growth technology company. I expect its revenue will grow at a CAGR of around 6% in the next five years driven by its differentiated automotive domain controller and robotic application semiconductor products. The company’s expertise in developing computer vision products helps it grow revenue from automotive, industrial and Internet of Things (“IoT”) camera markets. Since these markets are evolving with long-term growth opportunities, Ambarella’s revenue growth will sustain from these markets. Long-term investors can buy the company’s shares around the current price.
Ambarella develops low-power System-on-Chips or SoCs for computer vision, and artificial intelligence or AI applications. The company’s technologies make electronic systems smarter by offering the systems features such as person detection, object classification, and analytics. The company has expertise in the development of deployable and scalable semiconductor solutions for intelligent electronic systems.
Growth Drivers
Central Domain Controller Products
Ambarella’s main growth driver is its central domain controller SoC products for autonomous vehicles. The central domain controller is connected to the camera, radar, lidar and other sensor suites for autonomous vehicle path planning. The domain controller fuses the sensor data to perceive the vehicle’s surroundings using neural network. Depending on the multi-sensor surround perception, the domain controller estimates a driving path for the vehicle which is not only safe but also the shortest. The company’s central domain controllers provide cost-effective single-chip processing for multi-sensor perception, including cameras, radar, ultrasonic and lidar. In addition, they offer deep fusion capabilities for multiple sensor modalities, which leads to cost-effective and low-power driving. As a result, these products beat competitor products and enjoy strong demand in the automotive marketplace. Ambarella’s central domain controller products have the potential to boost its long-term revenue growth significantly.
Emerging Robotic Application Solutions
The company’s another growth driver is its SoC solutions for industrial and home robotic applications. These solutions add intelligence to a range of partially or fully robotic applications. Such intelligence includes access control, factory and home automation, and vision through sensing cameras. The SoCs handle an array of complex algorithms for performing low-level neural network-related functions to higher-level autonomous software stack-related functions. Due to these capabilities, these SoCs perform well in competitive environment. They can enhance the company’s long-term revenue growth to a significant extent.
Competition
The AI, and video and image processing markets are highly competitive. Ambarella’s competitors in these markets include AMLogic, HiSilicon owned by Huawei Technologies, NVIDIA Corporation (NVDA), Qualcomm (QCOM), Mobileye owned by Intel (INTC), OmniVision Technologies, Socionext, Horizon Robotics, iCatch Technology, NXP Semiconductors (NXPI), and Texas Instruments (TXN). Ambarella competes with these companies on the basis of innovative technology, product quality, and price.
The company has a couple of competitive advantages. First, its AI and computer vision processing architecture, known as CVflow, helps customers differentiate their products by porting their own algorithms and neural networks to Ambarella’s SoCs. CVflow has a flexible hardware engine programmed with a high-level algorithm. The combination of these hardware and software allows the company’s customers to achieve increased performance while minimizing die size and power consumption. Second, the company has invested heavily to develop its comprehensive and flexible software. The software is responsible for its high-performance video application solutions. The software consists of highly customized middleware and firmware. The middleware integrates many unique features for efficient scheduling and other system-level functions. The firmware helps reduce power requirements and improve performance. Both of these competitive advantages help Ambarella expand long-term revenue growth on a sustainable basis.
Ambarella Becoming An Edge AI Company
Ambarella’s fourth quarter fiscal 2023 revenue was $83.32 million, down 7.7% year-over-year. For the fiscal year ending January 31, 2023, revenue came in at $337.6 million, up 1.7% year-over-year. Non-GAAP EPS for the quarter was $0.23, compared to non-GAAP EPS of $0.45 in the year-ago period.
The company’s fourth quarter fiscal 2023 results were not encouraging. However, the company is slowly but steadily transforming into an edge AI company, with edge AI focused SoCs are gradually being brought into the market. During this quarter, the company’s CV3-AD, the first processor in its 3rd generation edge AI family, was broadly sampled. In addition, the company commenced mass production of CV5, its first 5nm SoC. As the company is slowly becoming a strong edge AI company with its focused markets driving long-term revenue growth, its stock appears to be a lucrative investment amid short-term weakness.
The company’s revenue guidance for the first quarter of fiscal year 2024 came in between $60.0 million and $64.0 million, which was a weak guidance. As a result, the company’s stock is currently in correction mode. However, given the company’s strong long-term growth prospects, as mentioned above, the company’s shares can be accumulated gradually around the current price.
The company’s computer vision (“CV”) SoCs enjoy strong demand. In the fiscal year 2024, the company expects CV to continue to grow in absolute dollars, driving its ASP significantly higher. According to a report:
The global camera module market attained a value of around USD 34.5 billion in 2020. The market is further expected to grow at a CAGR of nearly 7.8% in the forecast period of 2023-2028 to reach a value of around USD 54.1 billion by 2026.
As the report suggests, global camera module market is a growing market. Hence, I expect Ambarella’s CV SoCs will drive the company’s revenue growth significantly higher in the next five years.
Valuation
Ambarella’s peer group companies include Qualcomm, NXP Semiconductors, Texas Instruments, Analog Devices (ADI), and Microchip Technology (MCHP).
|
AMBA |
QCOM |
NXPI |
TXN |
ADI |
MCHP |
|
|
P/E Non-GAAP (‘TTM’) |
54.92x |
9.76x |
11.17x |
18.12x |
17.08x |
12.51x |
|
Price/Sales (‘TTM’) |
6.93x |
2.98x |
3.20x |
7.73x |
7.27x |
4.93x |
|
Price/Cash Flow (‘TTM’) |
54.72x |
12.53x |
10.75x |
19.39x |
17.88x |
10.75x |
(Data Source: Seeking Alpha)
Ambarella is expensively valued compared to its peer group companies. The company has a cash rich balance sheet consisting of cash and equivalents of $113.5 million, and total debt of $8.6 million. The company is expensively valued since its current focus is on developing edge AI semiconductor solutions with significant growth prospects. Edge AI semiconductor solutions consist of solutions for autonomous vehicles, IoT, home and factory automation, and robotics. Since these markets are growing slowly but steadily, and Ambarella addresses the challenges of these markets successfully, it can be considered as a company of the future. In the past five years, the company’s revenue has grown at a CAGR of 2.71%, and I expect revenue will grow at a CAGR of around 6% in the next five years, driving its share price significantly higher. In my opinion, long-term investors can buy the company’s shares around the current price.
Ambarella’s revenue has grown at a CAGR of 2.71% in the last five years. Assuming that revenue will grow at a CAGR of around 6% in the next five years, I will find out the company’s long-term (five-year) share price. The company’s trailing 12-month revenue is $337.60 million, and at a CAGR of 6% its beginning-2028 revenue will be $451.80 million, or $11.41 per share. In the last one year the company’s shares have traded between the price to sales multiples of 5.5x and 11x. I expect the company’s price to sales multiple will touch a high of around 10x in the next five years, driven by the company’s transformation to an edge AI company. Applying a price to sales multiple of 10x on the company’s beginning-2028 expected revenue per share, I get the company’s beginning-2028 share price as $114.10.
Risks
The company’s future revenue growth depends on its ability to grow market share particularly within the IoT and automotive camera markets. If any of these markets do not develop as the company currently anticipates, and the technical requirements of these markets evolve differently, the company’s products targeted at these markets could become uncompetitive. As a result, the company’s revenue growth and profitability could be negatively impacted.
The company operates in a dynamic market environment with rapidly changing technologies, and if the company fails to develop and introduce new or enhanced technologies that meet market requirements on a timely basis, its business could be harmed. Convergence of other markets with or into the camera market could render the company’s products obsolete. As a result, its revenue growth could be negatively impacted.
Conclusion
Ambarella is a solid long-term revenue growth company. I believe the company is futuristic addressing the challenges of IoT, automotive and industrial end markets successfully. These markets offer significant long-term revenue growth opportunities to Ambarella. I believe the company has the potential to develop appropriate products for these markets with sustainable revenue growth. Long-term investors can buy the company’s shares around the current price.
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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