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Is Ambarella Stock a Buy?

By Demitri Kalogeropoulos – Dec 20, 2017 at 9:32AM

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Booming sales in the automotive sector could help the camera tech specialist get back to growth in 2018.

2017 was a wild year for Ambarella (AMBA -1.63%) shareholders. The stock lurched from a 20% gain to a 25% loss before finishing modestly higher while underperforming the broader market.

That intense volatility suggests investors aren't sure what to make of the camera technology specialist's business. On the one hand, revenue and profitability are declining as competition heats up across its biggest markets. Yet on the bright side, Ambarella's image processing hardware and software innovations are finding their way into more and more products, including in big emerging industry like assisted and autonomous automobiles.

With that big picture in mind, let's look at why Ambarella stock might make a good buy today.

An engineer working on a chip.

Image source: Getty Images.

Mixed recent results

Sales dropped 11% in the most recent quarter and gross profit margin fell to 64% from 66% in the year-ago period. Usually, a decline in revenue and profitability isn't cause for celebration, but in this case, the news injected some rare optimism into Ambarella's stock.

Both figures met management's guidance, which tells us the team has a good handle on industry demand trends right now. Sales also included a healthy 7% uptick in non-GoPro (GPRO) revenue, including in the markets of IP security and automotive. In fact, GoPro's portion of the sales base stopped at 21% in the third quarter, down from 30% a year ago. Growth in these other segments is making Ambarella a less volatile business that isn't so dependent on a tiny number of manufacturers that are concentrated in one industry niche.

The auto market opportunity

Plus, there are signs that Ambarella is about to see much stronger sales in the automotive segment. Its video capturing and recording technology has already found a home in popular aftermarket upgrades to things like dashboard cameras and side- and rear-view mirrors, especially in China. But these offerings are now starting to make the transition into standard equipment that's built in directly by major automakers. Honda recently picked one of Ambarella's processors, for example, to power one of its newest drive recording systems.

In addition to the huge market that these automotive applications represent, their sales have a good shot at reversing Ambarella's two-year slump in profitability. New generations of car recorders include features that warn about the potential for collisions and scan the area for pedestrians. Cameras can also determine when a car is drifting out of its lane or make high-definition recordings during parking situations, to be used as evidence in the case of parking accidents.

Sophisticated features like these give Ambarella opportunities to apply its engineering know-how toward advancing the industry -- while building a prime market position for itself in the process.

Looking ahead

Ambarella's fourth-quarter forecast predicts another big drop in sales and profitability as GoPro losses are just partially offset by the 10% growth that executives expect in their other segments. That means revenue is on track for its second straight annual decline, which is a problem for a growth stock like this.

Wall Street is looking past that recent slump toward what could be a brighter future ahead for the business. In addition to the rising auto division sales, Ambarella is excited to launch its first generation of computer vision chips.

It took the engineering team four years to produce that platform, and there's still no guarantee that it will win market share from the solutions provided by other chipmakers. That risk-packed, multiyear product lead time shows why Ambarella investors will need to keep a long-term mind-set if they decide to buy the stock on hopes of a growth rebound in 2018.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has a disclosure policy.

Stocks Mentioned

Ambarella Stock Quote
$78.07 (-1.63%) $-1.29
GoPro Stock Quote
$5.30 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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