Poor Ambarella (AMBA 2.65%). In spite of exceeding expectations during the 2020 fiscal year's first quarter, declining business results aren't showing any signs of reversing. The beleaguered chipmaker is sitting on a huge opportunity with its computer vision (CV) technology, but turning tech into cash is easier said than done. There were a small handful of reasons for optimism after the most recent report card, but investors will need to continue exercising patience with this stock.

What happened in Q1

After a total drubbing in 2018, in which Ambarella's sales fell 23%, there was no relief to be had in the first quarter of fiscal year 2020 (the three months ended April 30, 2019). Sales fell another 17%, and gross profit on product sold suffered as a result. The company reported results on June 4 and did better on the top and bottom lines than analysts had expected. In the meantime, operating expenses grew 3% in the quarter -- primarily attributable to research and development costs as the company keeps its foot on the gas with its CV products.

Metric

3 Months Ended April 30, 2019

3 Months Ended April 30, 2018

Change

Revenue

$47.2 million

$56.9 million

(17%)

Gross profit margin

59%

61.3%

(2.3 p.p.)

Operating expenses

$46.1 million

$44.8 million

3%

Earnings/(loss) per share

($0.53)

($0.30)

N/A

Adjusted earnings/(loss) per share

$0.01

$0.13

(92%)

Data source: Ambarella. YOY = year over year. P.p. = percentage point.

The accountants at Ambarella had to continue using red ink on the bottom line, and even adjusted earnings (which backs out stock-based compensation and other one-time items) were near running at a loss. The good news is that the company continues to make announcements that it is working with manufacturers to implement its CV chip designs into auto and camera products -- everything from automated parking assist features to ultra-high-definition security cameras with facial recognition.

Nevertheless, Ambarella management sees CV monetization taking place in three waves: professional security cameras, consumer security cameras, and automotive. The first wave isn't expected to contribute materially to results until next year, and automotive -- the biggest opportunity for Ambarella -- won't start kicking in until 2022 or 2023.

A closeup of a camera aperture opening.

Image source: Getty Images.

Tariff trolls are guarding the CV bridge

Ambarella's CV development can't come soon enough. Even if applications for CV were up and running at full speed right now, it still might not be enough to offset some short-term pain. The U.S.-China trade war stands to be highly disruptive to this semiconductor maker's business as it has significant operations across the Pacific. CEO Fermi Wang had this to say on the earnings call:

Although there is currently no regulation in place, there is a speculation our largest security camera customer in China may become subject to U.S. government regulations limiting or restricting our shipments to them. In addition, some of our customers, both in China and outside of China, will be facing higher tariff when their products are imported into the U.S. During these uncertain times, market share may shift between our customers, and such transition could be subject to disruptions. Furthermore, our non-security cameras customer in China may also be subject to the unfavorable geopolitical forces. Our largest competitor in the security camera semiconductor market, HiSilicon, a unit of Huawei, may also face headwinds of their own. As a result, one can see the environment is volatile with a wide range of potential outcomes. 

Case in point: Second-quarter revenue is expected to be $51 million to $53 million -- another 9% year-over-year decline. However, that includes some orders getting pulled forward, as Wang said some customers rushed to make purchases ahead of tariff implementation. If the new taxes prove to be disruptive over the longer term, things could get much worse later on in the year.

It isn't a pretty situation for a company that was already trying to make a transition away from its legacy consumer goods end market into newer applications. Geopolitics are now a major headwind as well, which means things are likely to deteriorate more before they get better. However, CV still presents significant opportunity in the years ahead. But there's no need to rush in and buy the stock now. A full-blown CV revolution is still some time off.