Ambarella (NASDAQ:AMBA) and Intel (NASDAQ:INTC) aren't often compared to each other. Both are semiconductor companies, but the former's enterprise value of $1.5 billion is dwarfed by Intel's value of over $180 billion.
Both chipmakers address different markets. Ambarella makes image processing system on chips (SoCs) for action cameras, drones, cars, and security cameras. Intel produces application processors for PCs and data centers, along with low-power chipsets for Internet of Things devices, programmable chips, and non-volatile memory chips.
However, the companies' interests recently started overlapping in several markets like drones and connected cars. Ambarella's SoCs can process images faster for computer vision chips to analyze, which could guide drones and driverless vehicles along autonomous paths. Intel sells Atom chips for drones and connected cars, and it acquired computer vision start-up Movidius and leading ADAS (advanced driver assistance systems) manufacturer Mobileye to expand its presence across those markets.
The market clearly favored Ambarella over Intel over the past 12 months. Ambarella rallied more than 50% during that period, while Intel rose just over 20%. But will those trajectories continue throughout the rest of the year? Let's examine both companies' growth potential, catalysts, challenges, and valuations to find out which stock is the better buy at current prices.
How fast are Ambarella and Intel growing?
Ambarella's revenue fell 2% to $310.3 million in fiscal 2017, due to waning demand for action camera SoCs, especially from its top customer GoPro (NASDAQ:GPRO). Ambarella doesn't disclose how much of its revenue comes from GoPro, but its dependence on the ailing action camera seems to be waning.
Stifel Nicolaus analyst Kevin Cassidy expects GoPro orders to account for just 5% of Ambarella's revenues this year (fiscal 2018), down from a prior forecast of 10%. This shift is mainly attributed to the growth of Ambarella's security, drone, and automotive businesses offsetting its ongoing softness in action cameras. Ambarella's revenue is expected to stay roughly flat this year, but rise 14% in fiscal 2019.
Intel's revenue rose 7.5% to $59.5 billion in fiscal 2016, but sales are expected to rise just 1% this year and 3% next year. That slowdown is mainly attributed to sluggish sales of PC and data center chips. PC sales are gradually rebounding, but Intel faces tough competition from new chips like AMD's Ryzen.
Data center chip sales remain weak due to weaker enterprise spending and a lack of meaningful reasons to upgrade. To make matters worse, rivals like AMD and Qualcomm are now trying to dent Intel's near-monopoly in the data center market with new high-end server chips.
Both companies face bottom-line challenges
Ambarella's earnings fell 12% in fiscal 2017, and analysts anticipate another 25% decline in 2018 before a 16% rebound in 2018. That bottom-line pressure is attributed to a combination of slowing sales (due to action cameras), higher expenses, and pricing pressure from rivals in the Chinese market.
Ambarella expects its full-year gross margin to dip to a multiyear low of 59%-62% this year, and it sees operating expenses rising 12%-14%. Those increased expenses were anticipated as the chipmaker shifts production over to 14nm SoCs and invests heavily in new computer vision chips, but they also indicate that investors should expect choppy bottom-line growth over the next few quarters.
Intel's earnings rose 17% last year, but Wall Street expects just 5% growth this year and 4% next year. That slowdown is attributed to the company's slowing sales growth and increased investments in new 10nm manufacturing processes.
Rolling out its next batch of 10nm chips (like Cannon Lake) as soon as possible can help Intel widen its moat against companies like AMD and Qualcomm. But unlike Ambarella, Intel expects both its gross and operating margins to improve this year as it cuts expenses.
The valuations and verdict
Ambarella trades at 35 times earnings, which is much higher than its industry average of 27. Intel trades at just 16 times earnings, which is lower than its industry average of 25. Intel also pays a forward dividend yield of 3%, while Ambarella has never paid a dividend.
In the end, I believe that Intel's stable (albeit slowing) growth on the top and bottom lines, lower valuation, and decent dividend make it a better buy than Ambarella today. Ambarella certainly has great growth potential as it diversifies away from GoPro and invests in new image processing technologies, but the stock simply seems too pricey at current levels.