Ambarella (NASDAQ:AMBA) recently partnered with Hella Aglaia to co-develop a new platform for next-generation advanced driver-assistance systems (ADAS) powered by Ambarella's CV22AQ computer vision chip and Hella's intelligent visual perception software.

Ambarella says the platform will feature "forward-facing, single-box ADAS cameras with advanced AI features and highly accurate image content recognition" for "safety-critical applications." Kay Talmi, a managing director at Hella, says that the company chose Ambarella's CV chip because it delivers "extremely high computer vision processing performance with the low power consumption required for single box ADAS camera designs."

A woman sits in a driverless car.

Image source: Getty Images.

Talmi notes that Hella's OEM (original equipment manufacturer) and tier-1 customers "are demanding an open camera platform which has the flexibility to add software features and that is combined with the performance necessary to run the next generation of deep neural network algorithms."

Ambarella CEO Fermi Wang stated that the CV22AQ -- the second system on chip (SoC) in its CVflow family of computer vision chips -- enables Hella's software to run "with maximum performance and efficiency" while offering their joint customers "the ability to differentiate by adding additional features."

The deal sounds like a win-win for both companies, but will it significantly widen Ambarella's moat against Intel's (NASDAQ:INTC) Mobileye, its biggest rival in the ADAS space?

Why is Ambarella struggling?

Ambarella generates most of its revenue from image-processing SoCs for action cameras, dash cams, security cameras, drones, and other devices. Orders from GoPro once accounted for most of its revenue, but the struggling action-camera maker has dropped Ambarella's SoCs from its newer cameras.

Ambarella planned to increase sales of its SoCs into other markets -- like drones, VR/AR headsets, security cameras, and connected cars -- but that transition hit some major speed bumps. First, DJI Innovations -- the biggest drone maker in the world -- started replacing Ambarella's SoCs with its own first-party chips and computer vision chips from Intel's Movidius.

Meanwhile, the AR/VR markets failed to grow as quickly as analysts had predicted, sales of non-GoPro action cameras dried up, and top security-camera makers started using cheaper Chinese SoCs or Intel's Movidius chips in higher-end devices.

Those headwinds caused Ambarella's revenue to slide 21% year over year to $176.7 million in the first nine months of fiscal 2019. On the bottom line, the company reported a loss of $25.9 million, compared to a profit of $17.6 million in the first nine months of 2018. That's why the stock has tumbled nearly 40% this year.

What's Ambarella's turnaround plan?

Ambarella's core turnaround strategy is to pivot away from basic image-processing SoCs toward advanced computer vision chips for the connected and driverless-car markets.

A driverless car on a highway.

Image source: Getty Images.

However, it's fighting a tough uphill battle against Intel in this market. Intel's Mobileye provides ADAS products for over 90% of the world's leading automakers, and the chipmaker is leveraging that market-leading position to sell its own EyeQ computer vision chips -- which debuted in 2008. Mobileye launched the newest version, the EyeQ4, earlier this year, and it plans to launch the EyeQ5 for fully autonomous vehicles by 2020. Ambarella only launched its first CV-series chip earlier this year.

Meanwhile, Intel can bundle its own Atom Automotive CPUs and Movidius computer vision chips into that ecosystem -- which makes it tough for smaller chipmakers like Ambarella to gain ground. Intel, Mobileye, BMW, and Fiat Chrysler are co-developing their own driverless platform, which could eventually be adopted by other automakers.

Intel has a dominant share of the ADAS market, a huge head start in computer vision chips, and much deeper pockets than Ambarella. Therefore, Ambarella's turnaround strategy boils down to David landing a perfectly placed shot between Goliath's eyes.

But don't count David out yet

Ambarella seems outgunned by Intel, but some analysts think that the little chipmaker still stands a chance. Morgan Stanley analyst Joseph Moore recently said that Ambarella's deal with Hella could help it "take on Mobileye" up to 2021 "and beyond."

The computer-vision chip market also still has plenty of room for growth, with Markets and Markets expecting it to expand from $11.9 billion this year to $17.4 billion in 2023. Therefore, there could be room for Ambarella, Intel, and other players to grow without trampling each other.

Ambarella can also leverage its best-in-breed reputation in image-processing SoCs to convince more automakers to try out its CV chips -- especially if Hella's software gives it an edge against Intel's hardware and software bundles. Some automakers might also be willing to adopt Ambarella and Hella's next-gen platform to avoid being locked into Intel's ecosystem.

Lastly, Ambarella's low enterprise value of $850 million and its expansion into the ADAS and computer-vision chip markets could make it a lucrative takeover target for bigger chipmakers like Qualcomm -- which failed to acquire automotive-chip maker NXP earlier this year.

The bottom line

Ambarella's deal with Hella won't move the needle on its own, but it could strengthen its defenses against Intel and make it a more attractive partner for automakers. But for now, Intel still clearly has the upper hand in the ADAS and driverless-car markets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.