Ambarella's (AMBA 2.35%) business has been in the doldrums as its over-reliance on GoPro for a big portion of its revenue has backfired. The company is now scrambling to diversify its business so that it can get back on track, and its bet on the automotive industry could be its best chance of a turnaround.

Not surprisingly, Ambarella has been pushing the first chip from the CVflow family -- the CV1 4K stereovision processor -- for automotive applications, and such a strategy could work wonders in the long run.

Ambarella zooms into the self-driving car market

Ambarella has drummed up a lot of hype around its CVflow architecture. The chipmaker aims to tap automotive applications such as advanced driver-assistance systems (ADAS), video security cameras, and autonomous drones with this platform. Automotive could be its biggest opportunity with CVflow as autonomous cars will need a lot of cameras to drive themselves.

Person reading a book inside a self-driving car.

Image Source: Getty Images.

Earlier this year, Ambarella launched an Embedded Vehicle Autonomy (EVA) platform that's powered by cameras using the CV1 chip. The company claims that more than 40 automotive component suppliers and OEMs (original equipment manufacturers) expressed interest in EVA at this year's Consumer Electronics Show.

Ambarella also announced that it will demonstrate the capabilities of its fully autonomous EVA vehicle on the roads of Silicon Valley, which should help garner more interest from potential customers. Finally, it turned more heads when it announced the launch of its second-generation computer vision chip -- the CV2 -- less than three months after the CV1.

The company claims that this new chip is 20 times more powerful than its predecessor. Furthermore, Ambarella says that CV2 is well-suited for autonomous driving applications, because it is more accurate when it comes to the perception of surroundings, which is extremely important for a self-driving car. And finally, the CV2 chip platform requires fewer chips to power autonomous driving operations, which reduces power consumption.

It isn't possible to pit Ambarella's system against that of its rivals just yet, because the likes of Intel and NVIDIA have successfully demonstrated the expertise of their platforms in real-world situations. But at the same time, the fact that Ambarella has accelerated its technological development in this space cannot be discounted.

The company has made a really fast jump from its first to second-generation chip. By comparison, NVIDIA had taken over a year to move from its first self-driving architecture to the second one. Given that self-driving cars are still in their infancy, Ambarella still has a lot to play for in the automotive market thanks to the multi-billion dollar opportunity there.

Why automotive could supercharge Ambarella's growth

The simple reason Ambarella is jumping headfirst into the automotive market is that it can transform the company's fortunes in a big way. Consider this: Ambarella's trailing 12-month revenue stands at a modest $295 million, while the market for computer vision chips last year itself was worth an estimated $2 billion.

Ambarella estimates that this market could hit $8 billion in revenue by 2025 as the cars of tomorrow could be equipped with more than 10 cameras for capturing a vehicle's entire surroundings. Evidently, the chipmaker is making a play on this terrific opportunity with its product development moves and could carve a slice of this market for itself thanks to its relationships in this space.

Ambarella's chips are already approved for use in cars from OEMs such as Nissan, Toyota, Honda, and Renault, as well as Chinese players such as Geely and SAIC. So it is not surprising to see why the company is so confident about the growth of its automotive revenue after clocking 135% growth in this segment in the recently concluded fiscal year.

Ambarella, however, doesn't spell out exactly how much revenue it gets from the automotive business, but the massive jump seems to have mitigated the losses in other areas. For instance, Ambarella's business from GoPro and the drone market was in bad shape last year, pulling down the company's annual revenue by almost 5%.

The drop would have been more severe, but its business from other sources, including automotive, shot up almost 10% year over year. This year, Ambarella expects its automotive revenue to increase another 66% as its chips find their way into more products such as e-mirrors and surround-view cameras.

As such, the company sees OEMs supplying almost half of its automotive revenue this year as compared to a smaller fraction in the recently concluded fiscal year.

Can Ambarella make a big dent in automotive?

Ambarella has charted out a smart strategy to make a dent in the automotive space by exploiting its existing relationships. But the road to automotive success will be bumpy given the major competition present. Chip titans such as Intel and NVIDIA are engaged in a bitter self-driving car race, but at the same time, one cannot ignore that there is a lot of room for more than two or three companies to co-exist.

For instance, the overall automotive chip market could hit $35 billion in value by 2022, and Ambarella is targeting only a fraction of this market through its computer vision chips. If Ambarella brings its A-game to this market with a laser-like focus on product development, as it has done so far, it could make progress by sustaining the rapid pace of growth in automotive revenue.

In fact, even if the chipmaker carves out just 10% of the computer vision chip market for itself, its annual revenue could almost triple in the next few years. This makes Ambarella stock an appealing prospect for long-term investors, as it is currently trading at the lower end of its 52-week band.