Earlier this week, I spent some time digging into Ambarella's (NASDAQ:AMBA) worst product segment in 2016 so far. The wearable camera market was an easy target for that article, as its weakness over the past several quarters almost singlehandedly caused the video processing chip company's top and bottom lines to lose ground on a year-over-year basis -- and this despite Ambarella enjoying relative strength from its other segments.
Speaking of which, I'd be remiss if I didn't explore the other side of the coin for investors. So, which segment has proven itself to be Ambarella's best in 2016 so far?
First, I'll admit that's a tough question to definitively answer considering Ambarella doesn't predictably break down its sales by segment. Rather, management typically offers an overview of each market, including the current state of competition, design win activity, and general discussion surrounding any particularly pronounced weakness or strength from each segment.
In light of management's most recent comments, though, I think there's a tie in the race for winning the title of Ambarella's "best" segment this year between drones and the automotive market.
Incidentally, management even credited a "strong mix of higher-end products in the drone and auto market" for helping to drive stronger-than-expected gross margin last quarter. But that's not the only reason drones and autos are standout segments for Ambarella this year.
Regarding the former, Ambarella management previously confirmed early last year that chips and systems-on-chips (SoCs) designed for the drone market already comprised around 10% of total sales. Further -- and keeping in mind that wearables formerly represented around 30% of total sales before that segment began to wane -- management also suggested drone sales should grow to around 20% of total revenue when all is said and done this fiscal year.
More specifically, Ambarella is benefiting from the fact that as drone prices continue to fall, consumers are increasingly demanding these cheaper drones still possess the capabilities for 4K video, high-quality photos, HDR processing, and electronic image stabilization.
"Our ability to run many of these functions simultaneously provides us with a sustainable competitive advantage versus competing solutions," explained Ambarella CEO Fermi Wang earlier this month. "They are also failing to compete on video quality, features, power consumption, and the total solutions costs."
Consequently, Wang says, Ambarella has increased its market share in all drone categories where HD or Ultra HD video is required.
Ambarella's most recent developments in the automotive space are just as exciting.
Last quarter, for example, Wang pointed out that in the past, Ambarella has traditionally offered camera SoCs for video camera recorders or dash cameras for aftermarket sales. But more recently, Ambarella is also collecting revenue and design wins for video cameras offered as either dealer fit options or integrated into new OEM vehicles.
That said, the majority of Ambarella's traction in the OEM automotive space has come from China to date, most recently including new dash cameras based on Ambarella's A7LA automotive camera SoC in Geely's popular Emgrand EC7 sedan. But according to Wang, Ambarella only just began shipping automotive SoCs for new European OEM models last quarter, indicating this isn't simply a one-off opportunity.
And video recorders aren't the only applications available for Ambarella to further penetrate the automotive OEM business. Over the medium term, if Ambarella can sustain its design win opportunity in the OEM camera recording space, it should serve as an effective segue into other next-generation automotive products, including 360-degree view monitoring (AVM), e-mirrors that integrate viewing cameras on the side mirrors of a vehicle, and advanced driver-assistance systems (ADAS) that aid in object/collision avoidance and driver alerts.
To be fair, we still have over two months left in 2016. And Ambarella management confirmed earlier this month it expects the company to return to year-over-year revenue growth in the current quarter given an impending recovery in the wearables market. But when all is said and done this year, I think investors will be happy to see Ambarella emerge a stronger, more diversified company thanks to its progress in drones and automotive.
Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.