Ambarella (NASDAQ: AMBA) makes chips, software and codecs for high-definition cameras used in a number of products across an array of industries. This chipmaker’s stock is currently priced around $38.88. The company is currently attempting to pivot toward security and automobile sectors, yet the transition will take some time. At the moment, it is best to think of Ambarella as a computer vision chip creator and video processing company.
The software maker’s stock recently fell by a considerable amount following the company’s reporting of yet another quarter of lower sales. Though this reduction in sales was not as bad as some analysts expected, it is clear investors will have to wait until 2019 rolls around for the business (and possibly the stock) to bounce back.
Ambarella revenue decreased in the quarter ending July 31. Consumer product sales fell. In particular, action cameras, VR (virtual reality) devices and drones suffered the worst sales reductions. However, Ambarella experienced growth in its security camera and automotive sectors. If Ambarella can successfully disconnect from the comparably volatile consumer electronics sector, the stock could rebound quite nicely. It appears as though the chipmaker is finally rounding the corner on security and industrial applications after initial setbacks with VR and drones.
This computer vision technology, dubbed CV, is paving the way toward success. The development of CV chips is occurring right now, so Ambarella executives are using 2018 as a transition year. Unfortunately, Ambarella expenses continue to rise, partially due to research and development costs. Revenue from CV chips should arrive in the first half of 2020 at the latest. Aside from security cameras and automobiles in which CV chips are applied, industrial robots will also make use of this technology. It is clear CV will make Ambarella a company of many hats that is not strictly limited to a single industry or product.
Ambarella bears are adamant the company has terrible margins and is overvalued. The increasingly stiff competition has undoubtedly decreased the company’s gross margins. Elevated research and development spending on CV and additional technologies is the primary cause of Ambarella’s $6.7 million loss the past quarter. This is a discouraging figure as the company had an operating profit in excess of $5 million a year prior.
Then, there is the matter of Ambarella’s lofty valuation. The company currently trades at about 70 times the current year’s earnings. Ambarella trades at a whopping 60 times next year’s anticipated earnings. These are absurdly high multiples for a company that makes computer chips. The ugly truth of the matter is Ambarella has declining sales growth, increased competition and sliding earnings. If you are insistent on investing in computer vision, you should expand your search from Ambarella to the likes of Intel before making a financial commitment.
Ambarella might have a rocky road ahead. The fact that executives have thrown away 2018 and part of 2019 as transition years is somewhat alarming. Furthermore, the company expects consumer application revenue to be pressured in the short-term. Guidance for quarterly revenue is down more than 35% from the year-over-year midpoint. The near term does not look good for Ambarella, yet the decision to narrow the company’s focus on CV applications could pay off in the long run. The question is how long you are willing to wait for Ambarella to finally deliver on its promises. It might take until 2020 for Ambarella to become the success story company leaders so clearly envision.
At the moment, Ambarella is a sell/hold. Do not rule out a position in Ambarella in the months to come. Watch the company closely as it attempts to move beyond this transition year. If the transition proves graceful, you can always swoop in and scoop up Ambarella shares before investor interest is rekindled. If Ambarella drops down toward the low $30s, consider investing lightly at that point in time. Monitor the company’s news, stay abreast of its developments in computer vision and be ready to pounce when an opportunity arises.
Regards,
Ethan Warrick
Editor
Wealth Authority
