Ambarella: Taking Chips Off The Table
Summary:
- Ambarella, Inc.’s shares have seen a decent recovery as of late.
- Ambarella underlying results remain lackluster amidst supply chain issues and waning demand, after encouraging trends in 2021.
- Beware of the potential, I fail to have conviction as the promise is not showing up in the Ambarella, Inc. results yet.
In March of last year I concluded that investments were set to pay off in the case of Ambarella, Inc. (NASDAQ:AMBA) as the company spent tremendous amounts of money on R&D in order to expand its addressable market.
These investments were starting to pay off, although this payoff was in part masked by supply chain issues. With shares reset quite a bit, valuations were starting to look appealing at the time.
A Recap
When Ambarella, Inc. went public at just $6 per share a decade ago, I was puzzled behind the reasons for the failed public offering at the time. The company generated about $100 million in revenues from human viewing applications for consumer and security markets, posting $10 million in profits in the meantime.
Shares rallied to a high of $100 in 2015, creating a 15 bagger in just three years’ time, with shares trading stagnant around the $50 mark until 2020. Post the initial scare of the pandemic, shares rallied to the $100 mark again, with shares doubling again to $200 late in 2021, before selling off to levels in the $80s in March of last year.
Between 2012 and 2020, the company grew sales to $229 million, as revenues have more than doubled, decent, but not too spectacular. This is certainly the case if we look at the numbers on the bottom line with the company posting a GAAP operating loss of $50 million that year. In fact, a profitable business traded at just 1 times sales in 2012, but this valuation has risen to 6 times sales in 2020, albeit this time applied to an unprofitable business.
Looking at the situation from this angle, it is hard to reconcile the solid share price performance of Ambarella, as the reality is that Ambarella has invested large amounts to become an artificial intelligence semiconductor payer, investing large sums to become strong in neural networks.
In March 2021, the company posted its fiscal 2021 results, a year in which revenues fell modestly to $223 million, with GAAP operating losses increasing to $61 million. Momentum accelerated from hereon, with first quarter sales up 28% to $70 million, as second quarter sales rose by 58% to $79 million, while the company announced a $307 million deal to acquire adaptive AI software developer Oculii in the meantime as well.
In November 2021, the company grew third quarter sales by 64% to $92 million, pushing shares to a high around $200 per share. With revenues trending at $370 million and break-even levels within reach, investors were upbeat, with the market value peaking around $8 billion.
Through March, shares fell to $90 as fourth quarter sales rose just 45% to $90 million, with a $12 million operating loss posted. The 37 million shares valued the company at $3.3 billion including a modest net cash position, equal to 10 times sales. Note however that momentum was still seen and losses were coming down rapidly as I was becoming more upbeat. I indeed ended up taking a small position at $75 per share by early summer.
2022 – Tough, But Green Shoots
After taking on a few shares in June of last year, shares fell to a low of $50 per share in the fall as they ever since have doubled to $95 per share.
In May, Ambarella, Inc. posted a 29% increase in first quarter sales to $90 million with GAAP operating losses coming in around $10 million. Shares fell as the company guided for second quarter sales at a midpoint of $80 million. Second quarter sales came in at $81 million, up 2 percentage points on the year before as supply chain issues were accompanied by general weakness in end demand as well, with GAAP losses doubling to $20 million. No quick recovery was in sight, with third quarter sales seen around $83 million.
Third quarter sales came in at $83 million, down 10% on the year before after the third quarter of 2022 was particularly strong, with losses stable (on a sequential basis) around $20 million. Moreover, fourth quarter sales were again just seen at $83 million as increasing costs likely meant that losses might tick up a bit.
With 38 million shares now back up to the $95 mark, Ambarella, Inc. commands a $3.6 billion equity valuation, or $3.4 billion if we factor in net cash. With revenues trending around $330 million, and operating losses trending around $80 million, it is hard to get upbeat here.
What Now?
Truth is that I am sitting on near 30% gains here with Ambarella, Inc., but I am not that impressed with the fundamental performance of the company. While supply chain issues and a decline in demand has hurt Ambarella, Inc. in a huge manner, I have lost some of the conviction that I held in 2022.
On the other hand, there have been promising news developments at Ambarella, Inc. After hinting for years that computer-vision chips might convince customers from demos into actual products, the first signs of success are now seen. This comes as chips are integrated into the ADAS system of Continental.
Hence, I find myself in a tough spot. On the one hand, I am pleased to see the anecdotal evidence of improvements, but it still has to show up into the actual results, as the cold hard metrics continue to result in increasing valuations. Given all this, I am quite tempted to sell Ambarella, Inc. shares on rips here, lacking conviction to continue to hold the shares in anticipation of further improvements.
Disclosure: I/we have a beneficial long position in the shares of AMBA either through stock ownership, options, or other derivatives. 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.
Additional disclosure: Looking to sell out >$100
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