Is Ambarella a Turnaround Play?
- By Harsh Jain
Shares of Ambarella Inc. (AMBA) have surged more than 40% from its 52-week low following disappointing guidance after reporting second-quarter results. The stock is up nearly 9% year to date. The video-compression chipmaker reported fiscal third-quarter results on Nov. 30, beating expectations on the top and bottom lines.
For the quarter, the chipmaker posted earnings per share of 75 cents, beating estimates of 66 cents. Revenue of $89.1 million surpassed estimates of $89 million.
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The intrinsic value of AMBA
Despite the beat, its earnings plunged more than 60% from the prior-year quarter while its revenue dropped almost 11% year over year due to lower sales to GoPro (GPRO), which has decided to use its own video-processing chips in future devices. Revenue derived from GoPro dropped more than 45% year over year.
To overcome this issue, the chipmaker is aggressively trying to diversify itself away from GoPro by focusing on several high-growth markets such as automotive.
In the third quarter, revenue from its non-GoPro segments grew just 7.2%. The chipmaker anticipates sales of its chips for security camera manufactures, drone manufacturers and others will help it offset the GoPro declines and diversify its total business. This is easier said than done, however, as many of Ambarella"s customers are seeking cheaper alternatives with robust computer vision features.
Currently, Ambarella is relying heavily on its CV1 computer vision chip, which it recently sampled to key automotive and IP security customers. The company believes this new chip platform will help it gain a strong foothold in several growth markets, but it will face fierce competition from established rivals like Intel (INTC) going forward. As a result, many analysts project Ambarella"s top line will decline over 5% this year.
While the company posted better-than-expected profits for the quarter, the chipmaker"s key customers are looking for cheaper solutions, which in will force Ambarella to reduce its prices in the coming quarters. As a result, lower prices will reduce its gross margins and hurt its profitability.
Moving forward, for the current quarter, the chipmaker anticipates revenue in the range of $68 million to $72 million, signifying a decline between 22.5% and 17.5% year over year. It expects the adjusted gross margin to be between 62% and 64%.
Summing up
Ambarella jumped nearly 18% in the next two trading sessions after reporting third-quarter results. Although the company managed to beat estimates, its overall results were not impressive enough to justify the jump.
The chipmaker is relying on its CV1 chip, but it is still unclear whether the chip will be able to compete effectively against its rivals and produce meaningful revenue for the company. Intel is well ahead of Ambarella in the computer vision chip market and continues introducing new innovative and advanced chips based on deep learning.
Ambarella currently trades at a price-earnings (P/E) ratio of 57, considerably higher than the industry"s average. This suggests the stock is expensive at the current market price. As a result, investors should watch the stock until it shows meaningful signs of a turnaround.
Disclosure : No positions in the stocks mentioned in this article.
This article first appeared on GuruFocus.
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The intrinsic value of AMBA
