• Ambarella, Inc.’s AI edge demand is promising, but sales levels remain modest, leading to a slightly bullish stance when the stock trades between $50 and $75.
• The company reported strong FQ3 growth, driven by AI inference processors, but faces challenges with weak ADAS demand and reduced automotive backlog.
• With a strong balance sheet and potential for future growth, the stock is a slight buy, ideal for trading between $50 and $100.

Ambarella, Inc. (NASDAQ:AMBA) remains one of the most volatile chip companies due to the constant riding of the waves of the last hot product market. The company is now seeing an upside from AI edge demand, but the

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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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’d like to learn more about how to best position yourself in under valued stocks mispriced by the market to end November, consider joining Out Fox The Street. 

The service offers a model portfolio, daily updates, trade alerts and real-time chat. Sign up now for a risk-free 2-week trial to started finding the best stocks with potential to double and triple in the next few years. 

The post Ambarella: Riding The Next Wave appeared first on Up2info.com.

• Ambarella projects over 25% y/y revenue growth for fiscal 2026, driven by strong product momentum in automotive and IoT sectors.
• The company is debt-free with $230 million in cash, but its free cash flow is largely offset by stock-based compensation.
• Valued at 11x forward sales, Ambarella offers a compelling entry point for long-term investors despite competitive pressures and market volatility.
• Risks include potential inventory corrections and market downturns, which could impact investor willingness to pay the current valuation.

Investment Thesis

Ambarella (NASDAQ:AMBA) delivers very strong guidance for fiscal Q4 2025. More specifically, it now appears that investors can count on 50% y/y revenue growth rates for the next quarter.

Consequently, I now expect to see more than 25% y/y revenue growth rates in fiscal 2026 (starting February 2025).

Even though this investment thesis is not blemish-free, I believe that there’s a lot to like in this name and that over the next several months, investors will look back to $86 per share as a cheap price to get involved with this stock.

Ambarella’s Near-Term Prospects

Ambarella is a semiconductor company specializing in advanced processors for edge applications in the automotive and IoT sectors. Its value proposition lies in its innovative System-on-Chips that provide high-performance computing with power efficiency.

These processors enable intelligent features like advanced driver-assistance systems in vehicles and AI-driven video analytics in IoT devices, making them critical to next-generation technologies across auto and IoT sectors.

Ambarella’s product momentum is driven by its CV family of processors, including the high-value CV5 and upcoming CV7 chips. These chips are gaining traction due to their performance in automotive and enterprise IoT applications.

Ambarella operates in a highly competitive semiconductor industry, contending with giants like NVIDIA (NVDA) as well as smaller peers like Semtech (SMTC), as well as many others, which also develop AI processors for automotive and IoT markets.

On top of that, the slow adoption of Level 2+ autonomy and broader market weaknesses could be a source of headwinds to sustaining growth in this competitive landscape.

Given this balanced backdrop, let’s now delve into its fundamentals.

Ambarella’s Fiscal 2026 Could Deliver +25% CAGR

Before we go further, note that Ambarella is now in fiscal 2025 (not to be confused with calendar year).

During the earnings call, management noted that new product adoption was driving its strong outlook for fiscal Q4 2025.

Further, given its newly found momentum, Ambarella now projects fiscal 2025 (ending soon, in January 2025) revenue growth of approximately 23% y/y, up from the midteens it guided for last year.

What’s more, management nevertheless notes that there’s still some seasonality in its outlook.

And although management doesn’t provide any sort of tangible guidance for more than the quarter ahead, I believe that there’s a distinct possibility that Ambarella will grow at more than 30% CAGR next fiscal year.

Here’s my reasoning. Firstly, we know that between fiscal Q3 and fiscal Q4, Ambarella is delivering about $78 million to $83 million in revenues, albeit moving from higher revenues to slightly lower revenues, given the natural seasonality.

Nevertheless, I believe that expecting around $80 million in revenues in fiscal H1 2026 seems like a reasonable assessment.

Consequently, for fiscal H1 2026, even without much growth from fiscal Q3 2025, there’s a path here for Ambarella to deliver about +25% y/y growth rates with ease. Possibly more.

This would make AMBA look like a very different sort of company than investors have become accustomed to in the past several years. Indeed, it’s been more than 8 consecutive quarters since Ambarella has delivered +25% y/y revenue growth rates. This could be a new dawn.

With that in mind, let’s discuss its valuation.

AMBA Stock Valuation — 11x Forward Sales

What I like about Ambarella is that it is a debt-free business, with roughly $230 million of cash and marketable securities. This means that just over 6% of its market cap is made up of cash. Clearly something that is enticing for an Inflection investor, such as myself.

But where I struggle to get overly comfortable is that the business’ free cash flow profile leaves a lot to be desired. Case in point, for the first 9 months of fiscal 2025, Ambarella delivered $2.2 million of free cash flow.

And then, keep in mind that for fiscal 2024, Ambarella’s stock-based compensation was more than $100 million, see below.

So yes, Ambarella can proudly state that it has delivered 15 consecutive years of positive free cash flow. But if the vast majority of its free cash flow is going out the door as stock-based compensation, what’s left for shareholders? On the other hand, I ponder, does it matter? Am I overthinking matters?

Allow me to throw in a different reference point. In the most recent quarter, fiscal Q3 2025, Ambarella’s shares outstanding increased by slightly over 3% y/y. This continues its 3-year trend of diluting shareholders, see below.

As you can see above, in the past 3 years, the share count is up more than 20%. So, yes, Ambarella can highlight consistent free cash flow, but is there any excess free cash flow for me?

On yet the other hand, everything we’ve discussed in this section is already old news. It’s already in the price. What the future investor will care about is where the business is heading. Not where it’s been.

As you can see above, investors have been willing to pay approximately 11x forward sales for Ambarella. Sometimes slightly more and sometimes slightly less.

But for all intents and purposes, it appears that now investors are still willing to pay around 11x forward sales, including the after-hours jump, the only difference being that right now, they are getting a company that is demonstrably growing at more than 25% CAGR.

Important Risk Factors

Here’s the main bearish aspect. How many times over the past 5 years has Ambarella seemed to be Inflecting higher, only to disappoint investors? Inventory corrections have happened in the past. And they will also happen again in the future.

Hence, my question is this, how sustainable are these revenue growth rates?

The other consideration in my mind is that for now, investors are not too perturbed by paying around 11x forward sales for AMBA. But at the same time, the market right now is really hot.

If the market slows down, investors may be less inclined to pay 11x forward sales, and it’s not implausible for AMBA to return to around 8x forward sales.

The Bottom Line

As I reflect on Ambarella’s current positioning, I find the valuation of 11x forward sales compelling.

This pricing offers a unique opportunity to invest in a company poised to deliver over 25% y/y revenue growth for fiscal 2026. On the other hand, challenges such as competitive pressures remain, but I believe these are already in the price.

Moreover, with a strong debt-free balance sheet, and a clear growth trajectory, Ambarella’s potential to redefine itself as a high-growth story makes the current entry point attractive for long-term investors.

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.

Strong Investment Potential

My Marketplace highlights a portfolio of undervalued investment opportunities – stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued.

I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks.

Investing Made EASY

As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains.

• • Deep Value Returns’ Marketplace continues to rapidly grow.
  • Check out members’ reviews.
  • High-quality, actionable insightful stock picks.
  • The place where value is everything.

The post Ambarella Earnings: The Surge Could Make A New Dawn For Investors appeared first on Up2info.com.

• 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.

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.

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!

The post Ambarella: Intriguing, As We Have Been Here Before appeared first on Up2info.com.

• Ambarella’s Q2 results exceeded expectations in revenue and in earnings per shares, driving an 18% stock price jump today.
• The company’s optimistic outlook, particularly in the automotive and IoT sectors, and strong product positioning in AI and computer vision bolstered investor confidence.
• Ambarella’s unique vision-language model and real-time camera feedback technology provide a competitive edge, potentially justifying a higher share price.
• Despite risks from competitors and China’s EV market downturn, Ambarella’s growth prospects remain strong, with anticipated sales growth and reduced operating expenses in upcoming quarters.
• Related stocks include Samsara, Ouster, and Rivian.

Ahead of posting second quarter results for fiscal 2025, Ambarella, Inc. (NASDAQ:AMBA) traded as low as $40 earlier this month. In hindsight, Japan’s Black Monday moment pulled semiconductor equipment stocks sharply lower. After AMBA stock double-bottomed, the share price gained to close at closer to its moving average.

At the time of writing, AMBA shares added another 18% after posting a quarterly earnings per share loss and a 2.6% Y/Y increase in revenue. What did markets like about the company’s results and outlook?

Ambarella Second Quarter Results

Ambarella reported an EPS loss of $0.13, which beat consensus estimates by $0.06. Its revenue increased by 2.6% to $63.73 million, also exceeding expectations.

In the above earnings chart, the company beat expectations in the last three quarters before the Q2 report. Notice the EPS change Y/Y is on the rise.

Shares jumped by 18.5% in response to Ambarella’s outlook. Below is the stock chart before the open:

In the third quarter, the revenue forecast of between $77 million to $81 million surpasses the consensus estimate of $69 million. Markets are reacting to the wide difference between actual versus Wall Street’s forecast. 10 analysts already raised their earnings to the upside in the last 90 days.

The stock earns a B+ on its revisions grade as a result of the positive revisions.

In the factor grades offered by Seeking Alpha, the post-earnings rally will lift the momentum grade for AMBA stock after markets close today.

Increased Outlook

In the earnings press release, President and Chief Executive Officer Fermi Wang said attributed company-specific drivers more than offsetting the mixed global economic environment. The firm may now recognize initial revenue ramping up as customers in the IoT and automotive fields order Ambarella’s new products.

Markets did not expect the automotive sector to initiate such project spending. The electric vehicle bubble accelerated its pop by November 2023. Tesla (TSLA) bounced back from its stock sell-off. Polestar (PSNY) declined in value and Fisker filed for bankruptcy. Lucid Group (LCID) and Rivian (RIVN), however, formed an uptrend this year.

CEO Wang said that the company is optimistic about the long-term positioning of its new products. The company positioned them:

“to scale our current computer vision business into more advanced AI networks, including vision-language models and GenAI, where rising edge compute needs can drive revenue growth in the years to come.”

In the last quarter, Ambarella posted operating expenses of $56.76 million, up slightly from $54.92 million. For Q3, it expects non-GAAP operating expenses in the range of $49 million to $51 million. Shareholders may infer that expenses will fall as research and development costs trend lower. The firm will pivot from product development toward accelerating initial product sales.

Opportunities in AMBA Stock

The vision language model is an AI-like opportunity. Unlike ChatBots built on large language model training, Ambarella demonstrated LLaVA on an N1 chip at the Computer Electronics Show this year. This attracted many customers. Automotive firms expressed interest in attaching multiple cameras to LLaVA. CEO Wang said on the conference call that machines would have the capability of describing what the camera sees in real-time.

The CEO acknowledged that the company talked about computer vision for three quarters already. This time, realized revenue growth is a strong possibility. CV72 may run on a smaller model. As a result, cameras would provide real-time feedback. No other company offers this functionality. If it is successful, Ambarella would have a strong moat. This would justify a higher share price, even after the post-earnings stock jump.

In the next quarter, the CEO expects normal seasonality patterns (based on the last 10 years). In the next two quarters, results will benefit after the inventory correction is over. The company’s sales growth begins from strong demand for the products in the ramping-up phase.

Ambarella’s positive outlook is notably in contrast to that offered by Ouster (OUST). OUST shares fell from around $11 to close at $7.49 in response to weak Q2 results and cautious Q3 guidance. CEO Angus Pacala reasoned that the headwinds from broader macroeconomic and industry trends are consistent with Ouster seeing “some customer schedules pushed to the right.” As a result, Ouster warned that this would “soften” near-term growth.

Risks

Samsara (IOT) and Rivian are both ramping up with CV5 implementation in their products. Although it raises Ambarella’s quarterly forecast, it may not continue in future quarters. Investors seeking related stock picks in the automotive technology or EV sector may consider those two firms. Samsara is particularly attractive: it ranks 10 out of 192.

Rivian will likely survive the EV downturn since it specializes in the truck sector. However, Tesla only needs to offer affordable mainstream Cyber trucks to take Rivian’s market share.

Risks from China

China’s EV market downturn is another risk for Ambarella. Although it believes Chinese firms will keep driving innovative technology in vehicles, Ambarella is too optimistic. Firms like BYD Company (OTCPK:BYDDF) face punitive tariffs from the U.S., Europe, and Canada.

Your Takeaway

Until recently, markets neglected Ambarella’s growth prospects after losing patience. The strong guidance rewards shareholders who did not panic sell the stock earlier this month. Additionally, hype might lift AI-related stocks, but Ambarella’s implementation of language models in computer vision is unique.

The company will strengthen its moat as product sales accelerate. AMBA stock, even after rising today, does not fully price those growth prospects.

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.

Newly Launched: DIY Value Investing Basic. Get a top stock pick weekly. Readers who want to get urgent, daily commentary may join here.

The post Why Ambarella Soared After Posting Q2 2025 Results appeared first on Up2info.com.

• The stock was rallying on hopes for a turnaround at AMBA, but it got derailed after several recent developments.
• Ambarella has seen sales shrink and losses mount, and the stock has done just as badly in the last three years, but better times may be within reach.
• The Company is counting on the market in China to enable a return to growth, but that foray is fraught with risk due to the tussle surrounding AI.
• U.S. government policy is a wildcard that could shape the road ahead for AMBA, but it is not easy to tell what will happen on that front.

Ambarella (NASDAQ:AMBA), a supplier of low-power, system-on-chips or SoCs, has given back everything it gained after the last earnings report raised the value of the stock, based on the belief AMBA is set to return to growth after an extended period of contraction. The recent decline was caused by several contributing factors from different corners, which have yet to go away, but with AMBA scheduled to release its next report on August 27, an argument could be made that the recent drop in the stock presents an opportunity. However, the bull case for AMBA is not as obvious as it probably needs to be to get everyone on board. Why will be covered next.

AMBA Has Struggled For The Last Three Years

A past article from almost three years ago or September 2021 looked at the strengths and weaknesses of AMBA. On the one hand, the stock was in the midst of a powerful rally. In fact, the whole semiconductor sector was rallying at that time, all of which provided the incentive to get in on AMBA. On the other hand, AMBA traded at lofty valuations since a lot was expected from AMBA in terms of growth. AMBA, for instance, had a P/E ratio in the triple digits, which not everyone would be comfortable with. AMBA was thus rated a hold.

Being wary of paying a very high multiple for AMBA turned out to be warranted, as can be seen in the chart above. Instead of living up to the lofty growth expectations, AMBA has seen sales collapse, starting in the second half of 2021. In turn, AMBA racked up losses. In the last fiscal year, for instance, AMBA posted a GAAP loss of $169.4M or a record $4.25 a share in FY2024. The stock fell as the numbers from AMBA got worse.

AMBA hit a new 52-weeks and multi-year low of $39.69 as recently as August 7, 2024. The last time the stock went any lower was in March 2020. However, prior to this, the stock managed to put together a strong rally. This included a 20.6% gain in the stock after the release of the most recent or Q1 FY2025 report, before the stock collapsed in mid-July to new lows as shown in the chart above.

What Caused The Stock To Collapse In July

It’s no coincidence the decline started on July 17 with a drop of 8.4% on that day. On July 17, reports surfaced that the U.S. government was considering new restrictions on semiconductor companies doing business with China. This development affected the whole sector, but AMBA was particularly hard hit because the company has been counting on China to power a turnaround, as we will later see.

The decline continued in August as a result of a selloff in the stock market as a whole. A bunch of factors played a role here. This included geopolitical ones, including rising tensions in the Middle East, but also others like the unwinding of carry trades in financial markets. All this led to the drop in the stock from a high of $65.88 on July 16 to a low of $39.69 three weeks later on August 7.

However, the stock has rebounded in the last couple of days to close to $43.45 on August 9 for a market cap of $1.78B. AMBA is also set to announce its latest results on August 27 after the last report triggered a 20+% gain in the value of the stock. Some may be betting that could happen again, since nothing much has changed at AMBA itself since the last report. An argument can be made that if AMBA is set for an encore on August 27, then now is the time to get in on AMBA after the recent decline in the price of the stock.

Why There Is Reason To Be Upbeat About AMBA

As mentioned earlier, AMBA saw the top and the bottom-line shrink due to a drop in demand in the past few years. However, AMBA has responded by shifting away from its traditional business and moving towards new products with the intent to reignite growth. AMBA has placed particular focus on the application of artificial intelligence or AI at the edge through inference.

The last report showed that AMBA is making progress in making the transition towards become an inference AI play. In Q1 FY2025, AI-related revenue accounted for two-thirds of revenue. The FY2025 outlook sees AMBA returning to growth after contracting in FY2024. From the Q1 earnings call:

As expected, both auto and IoT revenue increased sequentially, and the AI products were about two-thirds of our total revenue. As previously discussed, our customers are in the midst of recovering from a cyclical inventory correction, and the favorable impact from this is expected to carry into the second quarter.

We continue to expect our fiscal ’25 revenue to grow year-over-year, driven by both the cyclical tailwinds and the secular growth in our AI portfolio. The combination of this cyclical and the secular forces is expected to enable our AI inference revenue to grow more than 30% in fiscal 2025.”

Source: AMBA earnings call

The consensus is that AMBA will report a non-GAAP loss of $0.19 a share on revenue of $62M when it releases its Q2 FY2025 report on August 27, based on AMBA’s guidance as shown below. Keep in mind that revenue has fallen YoY for 7 consecutive quarters. So for Q2 FY2025 revenue to come in flattish is significant progress, a sign AMBA is turning it around and putting the recent downturn in the rearview.

Click to enlarge

Source: AMBA Form 8-K

The numbers for Q2 FY2025 are expected to improve upon Q1 FY2025 as shown below. In Q1 FY2025, AMBA lost $10.47M or $0.26 a share on revenue of $54.48M, both down YoY. In terms of GAAP, AMBA lost $0.93 a share. The main difference between the GAAP and non-GAAP number is that the latter excludes $0.64 of stock-based compensation expense. AMBA finished the quarter with cash, cash equivalents and marketable securities totaling $203.3M, partially offset by $3.39M of total debt.

Click to enlarge

Source: AMBA Form 8-K

Why The Market Gave AMBA A Thumbs Up After The Q1 FY2025 Report

The value of the stock did not increase by over 20% after the Q1 FY2025 report for no reason. AMBA accomplished significant goals, which suggests AMBA is getting back to being a high-growth stock. AMBA, for example, scored its first design win for AMBA’s CV3-AD AI domain controller with a top five EV passenger vehicle company in China. AMBA believes this win alone could boost revenue by more than $100M.

Keep in mind FY2024 revenue came in at just $226.47M, so this is something that has the potential to really move the needle. AMBA scored another design win for its CV3-AD in China, with SANY in the market for commercial vehicles. AMBA also announced partnerships with other Chinese companies in the area of AI, particularly when it comes to autonomous driving. AMBA showed there is reason to believe a turnaround driven by the growing adoption of AI is starting to bear fruit.

Why There Are Grounds For Skepticism

This brings us to why the recent moves by the U.S. government could potentially spell trouble for AMBA. China played a prominent role at the Q1 FY205 earnings call since AMBA is counting on demand in China to power the turnaround, but AMBA is at risk of being denied full access to the market in China, depending on how new export restrictions are framed by the U.S. government.

Many of the previous export restrictions imposed on China by the U.S. government centered around AI. For instance, the U.S. restricted the supply of high-end GPUs from Nvidia (NVDA) that are needed for AI. So in theory, AMBA could stand to be affected since it too is trying to supply China with products that are centered on AI.

As previously shown, recent wins by AMBA came in China. If AMBA is denied access, whether in part or in full, then AMBA’s turnaround effort could be on shaky ground. It is too early to say, but those recent design wins in China may not benefit AMBA as much as previously thought. AMBA could still put together a turnaround, but it may have to do it without China.

If the turnaround is delayed because of intervention by the U.S. government, then AMBA could see its streak of annual losses extend. In terms of GAAP, which takes into account AMBA’s heavy use of stock-compensation expense, AMBA last finished with a net profit in FY2018. A look at the balance sheet shows an accumulated deficit of $172.86M, which shows that AMBA has lost more than it has made over the years. AMBA’s ability to generate a profit is shaky.

Nor has the top line grown much. Revenue grew at a CAGR of just 2.89% in the last 10 years. Yet, even though it has not really delivered in terms of growth, AMBA trades like a high-growth stock. AMBA, for instance, is valued at about 8 times sales with a market cap of $1.78B and TTM sales of 218.8M. In comparison, the median in the sector is 2.8x. Put all the above together, and you can see why long AMBA, despite its potential, is not as clear-cut as it needs to be.

Investor Takeaways

AMBA is scheduled to release its Q2 FY2025 report on August 27. The upcoming report is likely to build on the one that preceded it and one that helped trigger a major boost in the value of the stock. Some may want to get in on AMBA for this reason. AMBA will still end up in the red once again, but the numbers should be consistent with a company that is getting out of a deep downturn.

Furthermore, investor interest in potential AI plays remains as high as ever in the market and AMBA could be regarded as an AI play, although at the edge. Recent design wins in China show that AMBA has great growth potential. There is a reason after all why AMBA is assigned a relatively high valuation with multiples much higher than most.

However, potential export restrictions by the U.S. government could upend AMBA’s plan for a turnaround. That plan seemed to rely heavily on demand in China, and AMBA has had success there, but it is possible AMBA may have to go for a plan B, one that does not include China, or not as much. AMBA has to show it can duplicate its recent designs wins in China in other markets, but it has yet to do so. That could be a problem.

I am neutral on AMBA. It is possible there may no trade restrictions imposed on AMBA in China. If this happens, the stock has a chance to go higher on the back of growing demand for AI in China. At the same time, anyone who goes long AMBA needs to understand the risk associated with being long a stock that is exposed to potential trade restrictions on China, a market AMBA is counting on heavily.

If China is not an option for AMBA, bulls will have to wait longer for a turnaround, assuming there is one. New export rules can also be imposed at any point, so the stock could potentially be subject to a selloff when it is least expected. AMBA is a potential high-growth stock, which offers exposure to the AI market, but it is also a stock with a lot of risk attached to it.

Bottom line, if one wants to bet that there will be no restrictions on trading with China due to the U.S. government, than long AMBA could be worth considering. On the other hand, if one is not sure what will happen when it comes to trade restrictions on AMBA, then it may be better to not place bets that risk a sizable haircut in the event restrictions are imposed on AMBA.

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.

The post Ambarella: Headwinds May Put A Stop To The Turnaround appeared first on Up2info.com.

• Ambarella is entering another quarterly report with promises, but its history of execution is questionable.
• Quarterly revenue is expected to grow sequentially with all focus on FQ2 guidance for $60-plus million in quarterly revenue.
• The stock is already fairly valued at 6x to 8x sales targets, but Ambarella appears poised for another unsustainable rally due to AI and AV hype.

Ambarella (NASDAQ:AMBA) enters another quarterly report with a ton of promises, but the semiconductor company has no history of continuous execution. The most recent potential was a strong order backlog in automotive, but the company has already shifted to AI inference chips while sales have plunged. My investment thesis remains slightly bullish on the stock trading near lows due to a likely cyclical upturn in the business.

Turnaround Quarter

Ambarella has a history of catching onto the next trend without maintaining leadership for sustained growth over multiple years and cycles. The company reported weak FQ4 results back in February and the expectation is for FQ1’25 numbers on May 30 as follows:

• EPS -$0.31
• Revenue of $54.0 million (down 13% YoY)

Quarterly revenue is expected to grow more than $2 million sequentially following the lows of just above $50 million in FQ3’24. The prior FY saw IoT revenues end the year down 40% YoY and automotive was down 14% leading to only $15 to $20 million in quarterly auto revenues. The tough semiconductor space in the last year didn’t help, but Ambarella is involved in autonomous driving and supposedly AI inference technology that should lead to sustained growth.

Unfortunately, the company has a massive history of high performance vision chips in demand from drones to now autos, but Ambarella is never able to sustain the growth. Quarterly revenues topped $90 million all the way back in 2015 and recently printed those levels in 2022 before leading to another dip back to $50 million again.

Consensus analyst forecasts have revenues rising back to nearly $60 million in FQ2 and closer to $70 million to end FY25 in January. The stock has a history of big runs, including hitting $100 on the automotive excitement back in early 2023 due to the company discussing automotive funnel reaching $2.3 billion last year.

As in the past, all of the stock rallies fizzle out as cyclical sales hit a wall. Investors will want to hear something from management regarding the sustainability of any up cycle this time.

For the stock to really rally, Ambarella has to confirm a FQ2 sales jump back above $60 million and the company is on a path back to $70-plus million in quarterly revenues. On the FQ4’24 earnings call, CEO Fermi Wang seemed to confirm confidence with analyst consensus estimates as follows:

First of all, we didn’t guide any quarter to be 70 million in our guidance. We talk about, we believe that we’re going to have growth this year and also believe that our Q1 guidance. But overall, I think when I look at the number that Street’s predicting, I think it’s reasonable. And also that based on what we have seen with our customer demands and as well as our booking, I feel comfortable with the current Q1, Q2 guidance. Of course, Q3, Q4, we haven’t seen enough booking, but however the momentum is there.

The new CV5 chip provides ASPs in the $30 to $40 range vs. the CV2 chip with an average ASP in the high teen range. The chip company has what appears substantial upside from selling more content. The company is confident in competing with Qualcomm (QCOM) on AI inference chips, but Ambarella has provided the market with no confidence of beating out a chip giant for a large market.

The automotive backlog is a prime example of a business where orders can grow over a four- to five-year period. Ambarella discussed deals with automotive customers, such as XPeng (XPEV), but again the company can’t actually produce sustainable sales growth.

Not Exactly Cheap

While Ambarella has unfulfilled potential, the stock tends to trade somewhat based on that potential. The stock currently has a market cap of $2 billion with a revenue run rate at $200 million, or close to 10x sales.

The consensus estimates have revenues rebounding to $250 million this fiscal year and reaching to $320 million in FY25. Ambarella trades at 6x to 8x those sales targets, which is probably aggressive for a semiconductor stock producing revenue near the lowest level of the last decade when chip demand has absolutely soared.

The chip company has a nice $220 million cash balance, but the company is forecast to produce losses for the next couple of years. One can’t really assume Ambarella finally hits a home run with AVs or AI.

Besides, the small chip company has struggled delivering profits recently due to the weak revenues. The FQ1 guidance for revenue of $54 million with gross margins of 62% leads to a gross profit of just $33.5 million.

The gross profit target is substantially below the $46 million-plus operating expense target. Ambarella would have to deliver $10 million-plus in additional quarterly revenues in order for gross profits to cover expenses, though the company does suggest quarterly revenues of $70 million are likely.

Takeaway

The key investor takeaway is that Ambarella appears poised for the next rally with a rebound in semiconductor demand and some promising sales growth in auto and AI. The chip company is unlikely to finally fulfill all of the big promises of computer vision chips, but Ambarella could be due for another big stock run. Investors just have to take the gains and not play Ambarella for a sustainable uptick in sales.

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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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’d like to learn more about how to best position yourself in under valued stocks mispriced by the market in May, consider joining Out Fox The Street. 

The service offers a model portfolio, daily updates, trade alerts and real-time chat. Sign up now for a risk-free 2-week trial. 

The post Ambarella: Unfulfilled Potential appeared first on Up2info.com.

• Ambarella Inc. reported in-line Q4 results and outlook for 1QFY25. I expect this in-line trend to continue in 1HFY25.
• I think the company is too exposed to IoT and automotive markets to be able to outperform given the current correction cycle.
• The stock has underperformed the S&P 500 and lacks potential upside in the first half of FY25, in my opinion.
• Ambarella’s Asia exposure, particularly in China, may weigh further on its top-line growth, but this worst-case scenario is unlikely.
• I share my thoughts on Ambarella here, and why I think it’ll be in-line performer in 2024.

Investment Thesis

Ambarella, Inc. (NASDAQ:AMBA) reported its fourth quarter of FY2024 results and outlook for FY25 in late February, confirming what I believe will be a lackluster first half of FY2025. Ambarella is a relatively small-cap semiconductor company that develops low-power semiconductor solutions offering HD and Ultra HD compression, image processing, and powerful deep neural network processing, as outlined in their recent 10Q filing. I’m less optimistic about Ambarella because of the company’s exposure to the IoT (Internet of Things) and automotive markets, both undergoing a correction cycle in the first half of 2024. Sales to the former grew slightly in 4Q24 while the sales in the latter were flat. The company’s been somewhat stagnant in terms of outperforming consensus numbers for the past two quarters. I don’t see this changing even as the inventory correction is completed. I’m initiating Ambarella with a neutral rating as I don’t believe there is enough momentum to drive automotive and IoT demand this year, even after the correction cycle is over.

Ambarella’s Value Proposition

Ambarella stock has taken a hit over the past year, declining 34% compared to the S&P 500, up 33%, as shown in the graph below. Management reported that FY24 revenue was down 32.9% year-over-year due to “customers digested inventory resulting from the industry-wide semiconductor cyclical downturn,” as Ambarella CEO Fermi Wang noted on the earnings call. Ambarella’s products are used in “human vision and edge AI applications,” which encompass “video security, advanced driver assistance systems (ADAS), electronic mirror, drive recorder, driver/cabin monitoring, autonomous driving, and robotics applications.” It should be noted, however, that Ambarella was originally a human vision applications center company and only shifted to investing in AI over the past decade, roughly speaking.

The company’s main selling point (or expected growth catalyst) is its 10-nanometer CV2 family and 5-nanometer CV5, and management is particularly excited about the CV3 SoC family entering production. I like Ambarella’s position in the automotive and AI inference markets, with the majority of revenue coming from the IoT market. From my coverage of the IoT market, I can see a mixed outlook for 2024. I don’t see any catalyst to spark an end-demand recovery in the first half of FY25.

The stock’s underperformance has been somewhat consistent over the past three months, underperforming the S&P 500 by ~26% (shown in the graph below) and 25% over the past six months. Underperformance will moderate after the correction cycle is over as a result of inventory replenishment on the automaker front, but I don’t see enough potential upside to make the stock a buy for investors in 2024.

Management is now guiding for revenue between $52M-$56M for the next quarter; according to my calculations, this translates to 1-8% sequential growth, relatively in line with consensus numbers at $53.6M. Management noted on the call expectations for both IoT and automotive sales to grow sequentially, which inspires confidence in the next quarter’s results. There’s also a lot of talk about automotive taking over IoT as Ambarella’s bread and butter. I think this will be challenging for the company to achieve in 2024, given the mixed automotive outlook reflected in other semis like On Semiconductor (ON). I don’t expect Ambarella to underperform consensus, but I also don’t think it’ll materially outperform them. I expect the stock to be an in-line performer at best over the next quarter.

What Could Go Wrong?

Ambarella has an Asia issue, specifically an Asia exposure issue, with ~81% of total sales coming from Taiwan and Asia Pacific, as shown in the geographic breakdown of revenue provided below. I believe the current slowdown in China, particularly in EVs and the real estate market, will act as a headwind and weigh on Ambarella’s top-line growth for the year. Management noted on the earnings call for 4Q that the first CV3 revenue would come from China; this concerns me due to the softer end demand in China in the current macro backdrop.

Management’s response when being asked about the revenue out of China during the Q&A section of the call was as follows: “China continues to be one of the focus areas that we are in because I think that — I think everybody sees the EV development in China and we believe autonomous driving also will happen in China faster than other areas. So that’s definitely why we believe we can monetize our CV3 technology in China faster than any other areas.” I’m constructive on Ambarella’s longer-term position in China, but I don’t see the company experiencing any true recovery in the region during 1H24.

The worst-case scenario here, in my opinion, is that my hold is too gentle, and there is actually more downside to come. I think this could happen in the following scenario: if things in China get substantially worse. After wrapping up the first quarter of the year, I’ve come to believe that things in China for semis can’t get worse, and the impact across the peer group has been more or less priced in. However, if unexpected geopolitical tensions materialize between China and Taiwan, I think there could be a material downside for the entire semi peer group, including Ambarella. I don’t believe this is likely, as I don’t think China can afford that kind of confrontation given its internal challenges in boosting the economy.

Don’t Get Fooled by the Valuation

Ambarella’s valuation makes the stock inexpensive or cheap, based on a relative methodology of valuing stocks in my coverage. Ambarella trades at a ratio of 7.2 for EV/Sales CY2024 compared to the peer group average ratio of 8, as shown with data generated by Refinitiv. I understand investors who would be tempted by the valuation, but I’d warn against getting fooled by it. I think the stock has a balanced risk-reward scenario for the year, but I see limited room for outperformance. I’d recommend looking into the stock in two quarters rather than today.

What’s Next?

In my opinion, Ambarella should be on investors’ watch list for the October quarter this year rather than at the end of Q1. I think the company does have a unique position in IoT and automotive and expect this to be a growth driver once the correction ends and once end demand shows signs of rebounding. I currently can’t see any catalyst at play that’ll drive automotive end demand, particularly for EVs; I think the price wars and Tesla (TSLA) and other EV makers’ results next quarter will confirm my expectation of a lack of momentum in the auto market for 1H24 and early 2H24. I think investors should hold the stock if they own it and stay in the stands if they don’t until we see a catalyst at play or an inventory replenishment cycle near the October 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.

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.

The post Ambarella: Limited Momentum For Automotive And IoT Demand – Initiating With A Hold appeared first on Up2info.com.

• 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.

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!

The post Ambarella: More Talk Than Performance appeared first on Up2info.com.

• I upgrade my rating from hold to buy due to potential turnaround signs, including positive inventory trends and 4Q23 guidance.
• The long-term growth outlook has improved by $100 million, indicating the business environment is better than last year.
• AMBA’s focus on low-power edge applications and strong value propositions position the company for increased demand.

Summary

Following my coverage of Ambarella Inc. (NASDAQ:AMBA), I recommended a hold rating as I was concerned about the headwinds in the automotive markets and the setbacks that AMBA has faced in the surveillance segment. This post is to provide an update on my thoughts on the business and stock. I am revising my hold rating to a buy rating as I am now focused on FY26 performance, where I expect AMBA to see a strong acceleration in growth. Management comments on inventories and 4Q23 guidance hint that the worst has passed. The long-term growth outlook (based on management disclosures on pipelines) has also modestly increased by $100 million, suggesting the current operating environment has improved vs. last year.

Investment thesis

For 3Q23, AMBA posted revenue of $50.6 million, which is a 19% decline sequentially and a 39% decline vs. last year. The sequential decline was mainly due to continued weakness in IoT. Gross margin saw 62.6%, in line with consensus expectation of 62.6%. That said, non-GAAP EPS came in at -$0.28, well above the consensus estimate of -$0.39. Even though the results were clearly not great, I think it was noteworthy that after six consecutive quarters of negative guidance, AMBA finally guided to a positive 4Q24 (4Q23 guided for $51.5 million, implying sequential growth). Additionally, AMBA is also seeing indications of stabilization in inventories at both its own books and customers, which I take as a possible indication of a turnaround. To give better context, daily inventory turnovers have declined by 5 days on a sequential basis to 145 days. These are promising signs that AMBA is entering the next upcycle. As such, I pivot my attention to FY26 performance.

Management updated AMBA’s funnel of automotive wins with their annual report during the call. For those who may not be aware, this is something that management does annually; it gives a six-year funnel of possible opportunities and won business, and it updates the reader on the automotive pipeline. I think this is the most accurate measure of AMBA’s long-term growth potential because it takes into account both new business opportunities and deals that the company has already secured over the next six years. Hence, this metric is indicative of the revenue growth potential. Encouragingly, this metric has seen an increase of $100 million from $2.3 billion to $2.4 billion. Assuming that this $2.4 billion is spread evenly across the next 6 years, this implies revenue of $400 million per year, which is a major step up from FY23 and LTM revenue figures. That said, I think it is important to note that there have been some project delays and cancellations within this funnel of opportunities, which is likely to impact near-term revenue realization. Especially considering that the auto business is only expected to contribute $80 million in revenues this year, I believe the materialization of revenue over the next 6 years is likely to be back-half-weighted.

Looking further into the long term, I believe AMBA has positioned itself correctly to take advantage of the AI narrative. During the quarter, AMBA showed that inferencing on CV3-AD using LPDDR5 memory instead of HBM memory was possible, and they also imported Meta’s Llama 2 13B model properly. In comparison to existing solutions, AMBA’s solution uses far less power (as of 1Q24); hence, this successful demonstration should drive more demand for AMBA. To help customers speed up the deployment of generative AI and LLMs at the edge of their networks, management also highlighted how the company is bundling LLM software building blocks with its silicon solution. I think the value proposition is quite evident here: lower power consumption (lower cost) and acceleration of deployment (reduced time to market)—both factors should contribute to AMBA capturing share ahead. All of these simply prove that AMBA’s move into premium domain controllers with CV3 was the correct call, since it is now able to tackle broader markets. In addition, AMBA has made it clear that they are concentrating on applications that use lower-power edge appliances and have no plans to pursue cloud-based inference due to the high investment required. This is great as it means AMBA will not be stepping up its rate of cash, and it is playing in the field where it is familiar, greatly reducing execution risk.

And it’s not that we don’t want to focus on bigger cloud or you know much bigger applications. It’s really that, I think with our current silicon and our current resources, we would like to focus on areas that we know that we are familiar with and we want to know that we can win. 3Q24

Valuation

Before going into the details, note that I have shifted my focus from FY25 to FY26 as I look beyond the near-term performance (which has shown signs of stabilization). I believe the market is also adopting this longer-term view as valuation, on a forward revenue basis, has inched upwards to 8.4x, above the AMBA historical average of 6.4x. In my last model, I modeled FY25 to experience 9% growth, using AMBA historical financial performance as a benchmark. I have turned slightly more bullish, assuming that growth will come in line with consensus estimates, as management guided to positive revenue sequential growth in 4Q23, setting the base trend for FY24 (improving sequentially). For FY26, I believe the consensus 36% growth assumption is plausible. Using the subprime crisis cycle as a benchmark, the periods after FY12 saw accelerating growth, hitting ~31% in the 2nd year (FY24) after a strong 24% performance. Given that FY25 growth is only 11%, a good chance is that the 2^nd year of recovery will see much stronger growth.

As AMBA shows that it has gotten past the worst of this cycle, I believe the market will continue to put more attention on future growth, thereby supporting the current elevated (vs. historical average) valuation multiple. I assume AMBA will continue trading at 8.4x forward revenue, which translates to a share price of $71.

Risk

AMBA could very well still be in a downcycle, which means AMBA could miss management’s 4Q23 guide. This will be very bad from a narrative standpoint, as I believe the market is already assuming AMBA will see growth acceleration from here. If growth continues to be negative, firstly, the market will re-rate AMBA’s valuation down, and consensus will adjust their revenue expectations downward as well. A combination of both will send the share price diving.

Conclusion

I am upgrading my rating for AMBA from hold to buy. The positive development in inventories and guidance for 4Q23 hint at a potential turnaround. AMBA long-term (6 years funnel) pipeline also showed positive growth of $100 million, further cementing the possibility of a turnaround. Importantly, the $2.4 billion funnel implies strong growth potential ahead as it is back-end weighted. AMBA focus on the low-power edge applications have seen success and I expect it to drive more demand due to the strong value propositions (lower power consumption and time-to-market).

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.

The post Ambarella: Shift Forward To FY26, And Upgrade To Buy appeared first on Up2info.com.

• We initiate our coverage of Ambarella with a hold.
• 3Q24 results and outlook lead us to believe AMBA is seeing a slow recovery post-customer inventory correction and facing muted demand in IoT and auto markets.
• We think the weakness has been priced into the stock for the most part but don’t see a near-term catalyst driving substantial outperformance in the near term, underperforming the S&P 500 by 34%.
• Additionally, we believe AMBA is expensive at current levels, trading at 10.0x EV/C2023 sales versus the peer group average of 6.5x.
• We expect the stock to be an in-line performer to a slight outperformer in the near term.

We’re initiating Ambarella, Inc. (NASDAQ:AMBA) with a hold. AMBA is a semiconductor company that produces products used for human vision and edge AI applications, including video security, advanced driver assistance systems (ADAS), electronic mirrors, and monitoring for drivers/cabins. This quarter, management reported sales down 19% QoQ and 39% Y/Y to $50.6M, relatively in line with consensus expectations at $50M, and is now guiding for a slight QoQ growth to $50-53M, representing a 36-40% Y/Y decline and slightly ahead of consensus of $50.4M. We see a longer recovery story for the stock due to muted demand in both IoT and auto end markets. We think the auto and industrial correction will be the last leg of the correction in the semi space, aside from the AI correction next year that we expect to impact Nvidia (NVDA) primarily. Our neutral rating is based on our belief that the stock will only slightly outperform expectations for its January quarter by better-than-expected IoT growth while auto sales remain flat sequentially. We think investor money can be better placed elsewhere in 1H24. We see other semi stocks better positioned to outperform AMBA in the near term, including Semtech (SMTC). We think it’s still too early to jump into AMBA as 1. We expect sales to continue to be weighed down by inventory corrections and macro weakness, and 2. We don’t see any near-term catalyst offsetting the weakness.

Additionally, management also pushed out the timeline for its CV-based SoC auto program to 2026 or later, further confirming our belief that the company still hasn’t found stable footing post-correction is trying to manage expectations; for reference, AMBA’s low-power systems-on-chip or SoCs provide high-resolution video compression, advanced image, and radar processing.

The stock is down ~27% over the past six months and 21% YTD, underperforming the S&P 500 by roughly 34% and 45%. We think the macro weakness has been priced into the stock for the most part. Still, we expect AMBA to be more of an in-line performer in the near term.

The following graph outlines AMBA stock against the S&P 500 over the past six months.

The following graph compares AMBA stock against the S&P 500 over the past three months. The stock is up 8%, roughly in line with the S&P 500.

We’re more optimistic about the stock in 2HFY25 as management noted, “Our customers appear to be making progress with their inventory reduction efforts, and we expect to return to revenue growth in Fiscal 2025.” We think it’s too early to jump into the stock at current levels. We expect to see more favorable entry points down the line.

Valuation

AMBA is expensive, trading well above the peer group average. We think the higher multiple is not =justified with growth expectations in 2HFY24 and early FY25. The stock is trading at 10.0x EV/C2023 sales versus the peer group average of 6.5x. We think the pullback creates an attractive entry point into the stock at current levels – the stock dropped from a 52-week-high of $99.86 to a low of $43.59. Still, we don’t see AMBA outperforming materially in the near term and see no rush for investors to begin to initiate a position or add to their position at current levels.

The following outlines AMBA’s valuation against the peer group.

Word on Wall Street

Wall Street doesn’t share our neutral sentiment on the stock. Of the 18 analysts covering the stock, 10 are buy-rated, seven are hold-rated, and the remaining is sell-rated. We think Wall Street is more bullish on the stock due to the pullback in FY24 so far and attribute the sentiment to Wall Street’s belief that AMBA revenue has bottomed, and now the stock is better positioned to outperform. We see AMBA stock being an in-line performer to a slight outperformer but wouldn’t recommend investors add to their position for the near term due to AMBA’s slower recovery path post-inventory correction.

The stock is currently priced at $63 per share. The median sell-side price target is $70, while the mean is $74, with a potential upside of 11-17%.

The following graphs outline Wall Street’s sentiment on AMBA.

What to do With the Stock

We’re initiating our coverage on AMBA with a hold. We think the worst of the macro weakness and the correction is factored into the stock price, and outlook after the company forecasted sales below consensus in 2QFY24 for 3QFY24, and the stock dropped 21% YTD. We don’t see the stock working in the near term due to continued weakness in IoT and auto. We don’t see the company accelerating top-line growth materially in the first half of the year amid the current macro backdrop and recommend investors stay on the sidelines.

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.

Our investing group, Tech Contrarians, discussed this idea in more depth alongside the broader industry and macro trends. We cover the tech industry from the industry-first approach, sifting through market noise to capture outperformers. 

Feel free to test the service on a free two-week trial today. 

The post Ambarella: Initiating With Hold – Longer Recovery Path Post-Correction appeared first on Up2info.com.