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Will Ambarella Pass Its First Litmus Test of 2019?

By Harsh Chauhan – Updated Apr 10, 2019 at 6:41PM

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Investors sentiment remains positive thanks to recent design wins, but a massive test lies ahead.

Ambarella (AMBA 0.21%) investors have bid the stock up in the early months of 2019. Their optimism probably stems from the design win momentum of the company's computer vision chips launched more than a year ago, as they are expected to play a critical role in turning around the company's fortunes.

Ambarella reported its first computer vision design wins in the third quarter of fiscal 2019 that ended on Oct. 31, 2018. That was followed by the December launch of its CV22AQ automotive camera system-on-chip (SoC) that's supposed to enable artificial intelligence-related features in front ADAS (advanced driver assistance system) cameras.

The stock price action clearly shows that investors are excited with these developments. However, that enthusiasm will be tested when the company delivers its fiscal fourth-quarter results on March 5. Here's what to expect.

Check out the latest earnings call transcript for Ambarella.

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Image Source: Getty Images

Another painful quarter

Ambarella's fourth-quarter results are going to be ugly. According to its most recent guidance, revenue is supposed to fall 28% year over year to $51 million, while non-GAAP earnings are expected to go crash from $0.45 per share last year to $0.04 per share in the fourth quarter. The company expects the non-GAAP gross margin to drop nearly 5% annually.

The weakness stems from the declining influence of Ambarella's consumer business, which was once a critical driver for the company thanks to its tight relationship with action camera maker GoPro. The company is now getting less than 15% of its total revenue from the consumer business. This business was down 40% sequentially last quarter, and Ambarella expects the rot to continue as it shifts its focus toward computer vision.

That was evident from CFO Kevin Eichler's response to a question by an analyst regarding the future of the consumer electronics business during the last earnings conference call:

As yet, we are not going to guide out, but I think it'll definitely be lower. That market will continue to decline for us. We're not putting any of our investment resource in it and any of our focus on it. So I think the tail on that, it goes for several years, but it definitely will be declining over that period of time.

However, analysts expect the rate of Ambarella's top line erosion to come down. They are looking for $50.6 million in revenue for the first quarter of fiscal 2020, a drop of just 11% from the prior-year period. Additionally, Ambarella's top line is expected to increase in the mid-single digits this fiscal year, though achieving that could be a stretch.

The headwinds

Ambarella needs its design wins to translate into actual business if it is to actually grow its revenue this fiscal year. However, that's not a foregone conclusion sinceI did design wins don't necessarily translate into sales agreements.

Big companies usually select chip designs from multiple chipmakers to ensure that they don't run into supply issues. Additionally, there's the possibility that the products in which Ambarella's chips are being used don't sell as well as anticipated. If such variables don't fall into place for Ambarella, its product development efforts in the field of computer vision won't be of much use.

That's why the company's guidance and management's tone over the upcoming earnings call will play a crucial role in determining the stock's direction going forward. For instance, management had made it clear three months ago that its design wins in the professional and consumer surveillance camera markets are expected to deliver material revenue after a year or two.

For automotive, Ambarella believes that the potential of revenue generation is still "two to three years out." So, it won't be surprising if Ambarella's guidance turns out to be a disappointing one as its major catalyst isn't expected to kick in anytime soon, and that would spell disaster for the stock.

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.

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