Video-processing chip specialist Ambarella (AMBA 2.35%) got a shot in the arm after its fiscal fourth-quarter results outpaced Wall Street's expectations. The chipmaker is betting big on its new computer vision chips, which could help it crack into the lucrative self-driving car market, and that gives investors a good reason to keep the stock in their portfolios despite its recent troubles.

However, Ambarella's move into the autonomous car business will be met with a lot of resistance from already-established rivals with extremely deep pockets, though this hasn't diminished investors' enthusiasm about its chances. Is Ambarella worth the risk, or has the company lost its mojo?

A girl flying a drone.

Image Source: Ambarella 

The case for Ambarella

Transparency Market Research estimates that the global autonomous car market will grow at an annual pace of 47.5% between 2025 and 2035. If that proves accurate, the number of self-driving cars on public roads could increase from just 600,000 vehicles in 2025 to almost 30 million vehicles a decade later.

Not surprisingly, Ambarella has decided to join the fray of chipmakers developing solutions for autonomous cars. At the Consumer Electronics Show in Las Vegas in January, the company unveiled computer vision chips intended to tap the opportunities both in self-driving cars and autonomous drones.

The two chips -- CV1 and CV22 -- are based on the company's CVflow architecture. The company claims the CV1 chip can "detect generic objects without training, allowing more robust decisions to be made in ADAS and autonomous vehicle applications," thanks to the CVflow architecture's capacity for combining vision and stereo-based inputs with AI-based processing.

What's more, management claims the new architecture is more capable than GPU-powered self-driving car systems from the likes of NVIDIA (NVDA 4.00%), as it can scale up to provide extremely high levels of performance. The good news is that this new platform seems to have garnered a lot of attention.

Ambarella claimed that it met with more than 40 automotive companies and component suppliers after it showcased its Embedded Vehicle Autonomy (EVA) platform at CES. EVA uses multiple CV1-based cameras that provide a 360-degree view of the vehicle and is capable of detecting obstacles from 150 meters away. The system comes with all the bells and whistles such as traffic-light detection, lane detection, and classification of vehicles, pedestrian, or two-wheeled vehicles.

Meanwhile, the SuperDrone platform, also based on the CV1 chip, is capable of planning paths, avoiding obstacles, and navigating between multiple points, among other things. This could be another big catalyst for Ambarella: The commercial drone market is expected to hit an annual value of $17 billion in 2024 -- up from $2 billion at present -- according to Global Market Insights, and autonomous drones are expected to play a key role in this growth.

Ambarella has made a move into the right market with its new chip platform, and investors have bought into the story.

The case against Ambarella

Ambarella is trying to elbow its way into some big markets where the potential wins are commensurately large, but it's going up against rivals with deep technological expertise and deeper pockets. NVIDIA, for instance, has been working to develop self-driving car systems for three years now, and recently released a new chip that's supposed to be 10 times more powerful than its predecessor.

More importantly, NVIDIA has built a solid network of 225 partners that are already testing its chips for deployment in self-driving cars. Additionally, the graphics chip specialist has tied up with the likes of Uber to move into potentially lucrative markets such as autonomous taxis.

Meanwhile, Intel is busy upgrading its self-driving technology after acquiring Mobileye last year and is supplying its chips to Waymo, which currently leads the field in autonomous cars. So, Ambarella's rivals have already-established networks of partners that could eventually choose to use their chips in self-driving cars.

Moreover, Intel and NVIDIA probably won't sit back and allow a smaller player like Ambarella to eat their lunch when they have financial muscle on their side. Picture this: Ambarella has just $434 million in cash, compared to NVIDIA's war chest of $7.1 billion and Intel's hoard of $14 billion. So, betting on a turnaround at Ambarella based on a chip that has just seen the light of the day, and will have to compete against already established offerings from the chip titans mentioned above might need some serious consideration.

The verdict

Ambarella's top line fell almost 20% year over year last quarter, and its outlook indicates its revenue will drop another 10% to 15% this quarter. On top of that, Ambarella trades at a rich valuation. The stock's trailing price-to-earnings ratio of 52 is far higher than the industry average of 29.1, making an investment in the chipmaker now a bad idea -- especially as there is no guarantee it will engineer a turnaround.