Shares of Ambarella (AMBA +4.48%) fell nearly 30% over the past 12 months due to concerns about its slowing growth and soft demand from its action camera and drone markets. The bears also claim that Ambarella's niche of image processing SoCs didn't have an adequate moat against rival chipmakers.
The bulls often argue that Ambarella produced "best in breed" SoCs. That's why GoPro (GPRO 3.65%), DJI Innovations, and Hikvision -- respectively the largest action camera, drone, and security camera makers in the world -- all used Ambarella chipsets. The bulls also note that Ambarella's upcoming computer vision chip, CV1, could be widely used in autonomous drones, cars, and other devices.
Image source: Ambarella.
But over the past few months, GoPro and DJI both pivoted sharply away from Ambarella chipsets, as did Alphabet (GOOG 2.59%) (GOOGL 2.98%) subsidiary Google with its new Clips camera. Let's take a look at the chipsets powering their newer devices, and how they could impact Ambarella's long-term growth.
GoPro, DJI, and Google move away from Ambarella
GoPro is one of Ambarella's top customers, but that relationship has been a double-edged sword. GoPro lifted Ambarella to historic highs in late 2014 and 2015, but the party ended once demand for GoPro's cameras dried up.
Faced with shrinking margins, GoPro needed to buy cheaper chipsets to cut costs. It also wanted a custom design which wasn't readily available to competitors like Ambarella's SoCs. That's why it completely cut Ambarella out of the loop and hired Japanese chipmaker Socionext to create a custom GP1 SoC for its new Hero 6 cameras.
DJI's Spark drone. Image source: DJI.
DJI also recently revealed that its portable Spark drone didn't use an Ambarella chipset. Instead, the drone uses the Myriad 2 VPU (visual processing unit) from Intel's (INTC +3.56%) Movidius. DJI previously used the Myriad 2 alongside an Ambarella chipset in its flagship Phantom 4, but the Spark uses the Myriad 2 for both computer vision and image processing tasks. That alarming shift could eventually render Ambarella's SoCs obsolete.
Google also installed the Myriad 2 in its Clips camera, which automatically takes burst shots by learning and recognizing the faces in a user's life. The Myriad 2 processes those images in real time with Google's machine learning algorithms. Google previously installed Movidius chips in its Project Tango augmented reality tablets.
Google Clips. Image source: Google.
In retrospect, Intel's purchase of Movidius last year now seems like an Ambarella-killing play. Ambarella needs the CV1 to catch up to the Myriad 2, but that could be tough with the Myriad's first-mover's advantage and Intel's superior scale. Meanwhile, more action camera makers -- which previously followed GoPro's lead by using Ambarella SoCs -- could mimic GoPro again by designing or buying cheaper custom chipsets.
More headaches ahead for Ambarella
Ambarella wants to sell the CV1 to security camera and drone makers first before moving on to bigger markets like connected and driverless cars. But that market is already crowded with lots of competitors.
In addition to Intel, Ambarella needs to watch out for NVIDIA, which recently introduced a new Drive PX platform for fully autonomous driving, and Qualcomm (QCOM +8.53%), which will become the biggest automotive chipmaker in the world after its purchase of NXP Semiconductors closes.
Qualcomm also scored a few design wins in the action camera market with its mobile Snapdragon SoCs, which bundle together an application processor, image processor, and baseband modem. The addition of NXP's BlueBox autonomous driving platform and automotive chips should make Qualcomm a major threat to Ambarella in the computer vision market.
To top it all off, Chinese chipmakers are putting pressure on Ambarella's security camera business in China. That's why the company's non-GAAP gross margin fell 410 basis points annually to 63% last quarter.
The key takeaway
Ambarella's heyday is over, and its niche technology could soon be rendered obsolete by bigger chipmakers like Intel and Qualcomm. GoPro's shift to custom chips tells us that Ambarella chips aren't competitively priced, and DJI's tighter relationship with Movidius indicates that stand-alone VPUs can replace image processing SoCs.
Ambarella could potentially turn things around with CV1, but it doesn't expect to generate revenue from CV1 sales until next year, and the chipset will be entering a highly competitive market. Therefore, I think it's wise to follow GoPro and DJI's lead and avoid Ambarella.
