Once the poster boy of the chip industry thanks to its supplier relationship with action-camera specialist GoPro, Ambarella (NASDAQ:AMBA) looked all set to take advantage of hot tech trends such as drones, security cameras, and self-driving cars. However, the reality has turned out to be very different as the company is now in desperate need of a turnaround.

Not much has gone Ambarella's way since the popularity of GoPro's cameras started waning. Eventually, GoPro decided that it was in its best interests to diversify its supplier base, and this dealt a body blow to the video-processing chip specialist. The company has failed to recover from that loss, as its top- and bottom-line trends indicate.

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Ambarella has been in a state of decline for nearly three years now. Wall Street seems to have given up on the company, and the stock is trading near its 52-week low as of this writing. However, Ambarella will have a chance to set the record straight when it releases its fiscal third-quarter earnings report on Nov. 29. But can it deliver?

Man standing in front of a blackboard on which question marks are drawn.

Image Source: Getty Images.

Low expectations

Ambarella punched above its weight in the second quarter. Though its revenue and earnings nosedived, they were above analyst expectations. However, Ambarella's third-quarter guidance disappointed investors, as it became clear that the new businesses where it is trying its hand aren't gaining much traction.

Ambarella expects its third-quarter revenue to drop a massive 36% at the midpoint of its guidance range of $55.5 million to $58.5 million, far below analysts' original expectations of $73.5 million. That's much more severe than the 12.7% annual revenue drop the company experienced during the fiscal second quarter.

Ambarella has blamed the weakness on "lower demand for non-GoPro sports camera, the VR market remaining nascent, and the drone market leader, DJI, mostly using its own silicon solutions." Meanwhile, the company is witnessing annual revenue improvements in the IP security camera and automotive markets. But that growth clearly hasn't been enough to help Ambarella offset the major weakness it is witnessing in consumer applications.

As such, Ambarella seems consigned to deliver a weak quarterly report yet again. Investors will closely scrutinize the comments that the company makes around a product that could prove to be its ticket to growth in the long run.

The thing that matters

The chipmaker made a lot of noise earlier this year around its computer vision chips. This technology has the potential to transform Ambarella's fortunes, but that hasn't been the case so far.

The company confirmed at the end of August that it had been delivering computer vision chips to automotive customers for evaluation, but they seemed some time away from commercial adoption. Executive Vice President George Laplante said in August that " ... we believe the auto market will be below our previous growth expectations in the second half as delays in launching new customer end products will reduce our year-over-year growth expectations in this market."

Now, it is understandable that the evaluation process will take time before the company actually lands a contract, but Ambarella needs to show that it is making some concrete progress in this market where big players have already made notable headway.

Beyond automotive, Ambarella seems to be gaining traction in the IP camera market as customers have started launching products based on Ambarella chips. The company is looking to keep up this momentum by starting the mass production of computer vision chips for the IP security camera market in the first half of 2019 based on positive customer response.

Wait for a turnaround

Ambarella is going after fast-growing markets and spending the majority of its R&D dollars to develop computer vision chips. All that Ambarella needs is some solid customer wins;the upcoming quarterly report should provide investors a closer look at the progress it has made on this front.

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