Ambarella: More Talk Than Performance
Contributor since 2011 / 25497 Followers
Summary:
- Ambarella has been investing in AI applications, resulting in growing losses and disappointing financial results.
- The company’s stock has lost about three-quarters of its value since the peak, despite the booming AI market.
- Ambarella continues to face challenges, with operating losses ballooning to $155 million in 2024 and sales down a third.
SweetBunFactory
About a year ago I called for taking chips off the table in the case of Ambarella (NASDAQ:AMBA), as the risk-reward no longer looked too compelling. The company has started to post serious losses and has been investing for years to grab the AI opportunity, but so far this has only resulted in growing losses amidst stable, or even falling topline results.
After a very tough fiscal year 2024, which has taken shares down as well, investors are still asked to believe in a rosier future, with little tangible results providing evidence for that.
On Ambarella
Ambarella was founded in 2004, and has focused on digital video applications ever since, based on the premise that video is a unique kind of data which requires optimized chip architecture.
Ambarella was just a $6 stock when it went public in 2012, with the business generating about $100 million in revenues from human viewing applications for consumer and security markets. At the time, Ambarella was quite profitable already.
Until the mid 2010s, Ambarella focused on human viewing applications which require low-power and high-resolution, but ever since, it has started to invest considerable sums (and the majority of the R&D budget) into artificial intelligence applications. This resulted in the development of a deep neural network AI inference processor, which combined with computer vision drives another range of intelligent decision-making, and thus automation opportunities.
Many of these applications are expected to be used into automotive. By now, the company generates about three quarters of its sales from IoT solutions and the remainder from automotive applications, something expected to reverse in the coming years.
A Boom-Bust
A $6 stock at the time of the offering rallied to the $100 mark in 2015 as the business was doing fine and the company started investments into AI, as shares even rose towards the $200 mark in 2021.
That boom was largely based on hopes. While revenues rose towards $229 million, and more than doubled from the levels around the time of the public offering, the issue is that investments made the business unprofitable, as the company posted an operating loss of $50 million. This shows that expectations had risen considerably with the passage of time, although it was based on the hopes of becoming an AI force.
Even as shares fell to the $95 mark in March of last year, I was still cautious. At those levels, Ambarella was valued at $3.4 billion, equal to about 10 times sales of $330 million, while operating losses were reported to the tune of $80 million, and growth was negative, despite the investments being made and the emergence of AI.
Not convinced about the performance, as not all can be attributed to supply chain issues, I took profits on a minimal position as hopes on AI were still to show up in the results.
Continued Disappointments
Since March of last year, shares of Ambarella have lost about half their value, down from $95 to $50 at this point in time. This came as the company delivered continued disappointments despite a raging AI bull market.
In February 2023, Ambarella posted its 2023 fiscal results, a year in which revenues rose in a nominal fashion to $337 million and change, as operating losses were reported at $74 million, a loss which rose sharply compared to the year before. Problematic was that the company guided for first quarter fiscal 2024 sales at just $60-$64 million.
Fast forwarding a year, the company reported dismal 2024 results, a year in which revenues eventually were down a third to $226 million and change. The company continues to invest huge sums in R&D; in fact, such investments of $215 million approximate the topline results, as operating losses ballooned to $155 million. Even worse, fourth quarter sales of $51 million and change are even weaker, with operating losses reported at $41 million and change.
The only positive is that incremental improvements are seen in the first quarter of the fiscal year 2025, with sales seen between $52 and $56 million, yet these are baby steps from very low levels. Modest growth is expected to be driven by the AI momentum and the fact that inventory de-stocking appears to be on its end.
Continued dilution makes that the share count has risen to 40 million shares, granting the business a $2.0 billion equity valuation, a number which includes a net cash position of $220 million. The resulting $1.8 billion operating asset valuation values the business at about 8 times sales reported in 2024. Note that two-thirds of these sales are still generated from IoT, a segment which saw sales down 40%, and despite the promise, automotive sales were down 14%.
And Now?
In almost traditional fashion, the conference call sounds highly upbeat, talking about the growth opportunities. For now, investors had to believe in the growth story for years, as huge R&D investments have not paid off at all, and have resulted in continued losses, and thereby gradual dilution.
While some green shoots are seen, it should be recognized that revenues are off a long way from the peak, and the AI craze is in full swing. Amidst all this, this remains a massive belief story, although, shares have come down quite a bit as well.
Hence, this remains a very dangerous short given its potential, yet the same reason – that potential has not come through – makes it very hard to have conviction on the long side as well. Amidst all this, I see no reason to get involved in this more or less battleground stock, despite initial green shoots.
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.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
If you like to see more ideas, please subscribe to the premium service “Value in Corporate Events” here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!