Ambarella (NASDAQ:AMBA) somehow has managed to give investors some good news in what has otherwise turned out to be a terrible year for the chipmaker. The imaging-technology specialist's third-quarter results boosted Wall Street sentiment, thanks to the progress it made in the computer-vision (CV) business.

Ambarella has been talking a lot about how its CV chips will help it make a comeback in the long run by unlocking opportunities in the automotive and security-camera markets. But the company apparently hadn't made any tangible progress on this front in almost a year, telling investors that its chips were being evaluated by customers.

Ambarella now has taken the next step toward realizing its potential in the CV market. The company has scored its first CV-related design win to power an unnamed Tier 1 automotive company's advanced driver assistance system (ADAS) camera. However, investors shouldn't ignore that Ambarella still has a long way to go before it can make an actual comeback.

A man stands in front of a wall on which are drawn question marks.

Image Source: Getty Images.

An uphill task

Ambarella's adjusted third-quarter earnings beat expectations handsomely, while its revenue was in line with prior guidance. But this doesn't hide the fact that the company's top line fell nearly 36% from the prior-year period and it swung to a GAAP net loss of $9 million from a profit of $11.7 million.

Additionally, the company's guidance suggests the computer-vision design win isn't expected to make an immediate impact on Ambarella's financial fortunes.

Metric

Q4 2019 (Guidance)

Q4 2018 (Actual)

Year-Over-Year Change

Revenue

$51 million

$70.6 million

(28%)

Non-GAAP gross margin

59%-60.5%

64.70%

(4.95 bps) at midpoint

Non-GAAP EPS

$0.04

$0.45

(91%)

Data source: Revenue and gross margin guidance from Ambarella quarterly results and EPS estimate from Yahoo! Finance. GAAP = generally accepted accounting principles. EPS = earnings per share. BPS = basis points.

Ambarella investors were initially elated despite this decimation that's expected in the current quarter, believing that computer vision will help the company overcome its problems in the long run. However, reality dawned soon and the stock is down once again. That's probably because investors realized that the chipmaker has to show something more than just a design win to turn its business around.

Hold your horses

Ambarella talked at length in the quarterly earnings call with analysts about the computer-vision design wins scored by the company. The chipmaker believes that the ADAS camera win was driven by its ability to "deliver cost-effective, low power implementation with advanced AI [artificial intelligence] features." In fact, management went on to claim that, "customer benchmarks also confirm that our performance is significantly higher than competing solutions from legacy SoC [system on a chip] chip suppliers, enabling customers to offer Ambarella-based cameras with more advanced ADAS features."

That's an ambitious statement, as Ambarella is going up against seasoned and deep-pocketed chipmakers such as Intel in the computer-vision space. Ambarella needs to string together a series of automotive-design wins if it wants to make a dent in the automotive market.

Don't forget that the term "design win" doesn't necessarily guarantee sales growth. It signifies that a solution has been selected by a client for use in its products, which may or may not result in mass production. It may be possible that the client choosing Ambarella's CV SoC already has a primary supplier for its needs but needs a backup plan.

Ambarella investors should wait and see if the company's automotive win results in actual revenue. However, the company seems to be making good progress in the professional surveillance camera market with the CV chips, where it expects its "first mass production computer vision revenue" this quarter.

This is a nice opportunity for Ambarella as demand for professional surveillance equipment has been picking up. As it turns out, global demand for professional surveillance equipment increased 9.3% in 2017, which represents a solid improvement over 2016's 3.9% growth. The market is expected to hit $18.5 billion in size this year thanks to a 10.2% increase in demand.

Tread with caution

It's clear that Ambarella's business is in a bad shape and the only thing that can help it make a comeback is the success of its computer-vision chips. That's the reason investors were happy to see the company making progress on this front. However, Ambarella needs to deliver more than just design wins.

It would be prudent for investors to wait for Ambarella to come up with more design wins and contracts and prove that those wins are helping it turn the business around.

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