In this MarketFoolery segment, host Chris Hill and Million Dollar Portfolio's Jason Moser talk about the multiple issues Ambarella (NASDAQ:AMBA) has to overcome. It's not just that, as a key supplier of video-processing hardware to GoPro (NASDAQ:GPRO), it has hitched its wagon to a stone, but its system-on-a-chip (SoC) offerings require a level of constant refreshing and innovation that's tough to maintain.
A full transcript follows the video.
This video was recorded on June 7, 2017.
Chris Hill: We have to start with Ambarella, which is one of the biggest losers on the NASDAQ today. This is the chipmaker, key supplier to GoPro. Ambarella's first-quarter results looked OK, but their guidance for the current quarter is what sent Wall Street headed for the exits.
Jason Moser: Yeah, I think you pretty much said it in a nutshell there, key supplier to GoPro. So that should probably have you running in the other direction on its own.
Hill: Not key supplier to Apple.
Moser: [laughs] And I think what we saw it with a company like InvenSense is that if you are a supplier to Apple, that doesn't necessarily mean it's going to be all sunshine and lollipops, either. But with Ambarella, we talk a lot about trying to learn from mistakes, learn from businesses past and see why history might not repeat itself. It certainly rhymes in some cases. I think we may be seeing that same sort of thing playing out here with Ambarella as we saw with InvenSense. We owned Ambarella for a time in Million Dollar Portfolio. it was an interesting company. We thought there was a lot of potential there because of this move toward video, because of the fact that they were such a key supplier to GoPro. And that story quickly changed once we saw GoPro falling off the cliff. Ambarella, really sort of the one-two punch there. Not only are they getting hit on that supply side as a provider of chips to GoPro, but the problem with this technology, they have these systems on a chip hardware that they're selling, they're constantly having to figure out ways to innovate and get better.
There's always someone out there in this space that comes up with some sort of new technology that's a little bit better, a little bit faster, it produces a better picture, whatever it may be. So we sold in MDP, because we saw this picture where sales growth was starting to slow down. And typically, with a company like this, when sales growth starts to slow down, they're going to have to start conceding a little bit on pricing in order to get that product out there. And when you're conceding on your pricing in any capacity, and the company that you're supplying a lot of your product to is really seeing a major slowdown as well, those margins start getting squeezed pretty hard, too. And that's what has the market really down today on the stock. I think the biggest problem is the forward-looking picture. While the quarter itself wasn't all that bad -- I think they actually beat expectations on both fronts -- it's the picture going forward, and the market is starting to look at this and say, woah, maybe this is something where the path to success isn't quite as clear or as bright as perhaps we once thought? I really can't help but think this is going to be another InvenSense story. I don't know that it's a stock that I'd put up there as one I'd want to buy, because it's such a tough space. Scale is really the biggest advantage in this business. Ambarella, InvenSense, those are not companies that have that scale when you compare them to companies like Intel or Qualcomm.
Hill: So we get this question a lot, about entry point, what you're going to pay for a stock. And a lot of times, the question comes in the form of, I really like company X, the stock keeps going up, should I buy now or wait for a pullback so I can get a better entry point? You don't look at Ambarella falling 10% today and say ... unless it's just a really small --
Moser: I think, if you want to look at it from that perspective, you need to be able to identify the catalyst that's going to take this thing in the other direction. The problem is, that's not so easy to recognize, especially when it comes to technology like this, because it's really difficult to see what new technology is coming down the pike. That's not really what we specialize in, and not a lot of people are so capable to see around the corner. So I tend to look at something like this and think, it's not even like it's that cheap of a stock still, when you look at the fact that sales are slowing down and margins are being squeezed a little bit. This is one of those where you think, maybe there's a value trap here where, yeah, it's nice to buy on dips, but make sure that when you buy on that dip that there's a catalyst that gets this thing going back in the other direction. I just don't know that we can identify the catalyst with Ambarella today.