Ambarella (AMBA 1.82%) took investors on a wild ride over the past seven years. The maker of image processing SoCs (system on chips) went public at $6 in late 2012, soared to nearly $120 by June 2015, then tumbled to the low $30s by late 2018.
Ambarella's initial pop was sparked by robust sales of its SoCs to action camera maker GoPro (GPRO 7.51%), but the honeymoon ended when GoPro's sales peaked. Ambarella no longer relies on GoPro, and now focuses on selling computer vision chips and SoCs for other markets instead.
Image source: Getty Images.
Unfortunately, bigger rivals like Intel (INTC +3.00%) are also eyeing those same markets. That pressure, along with other macro headwinds, caused Ambarella's sales to decline on a year-over-year basis for eight straight quarters. That situation looks bleak -- yet Ambarella's stock recently rallied nearly 20% to a 52-week high after it reported its second-quarter numbers. Let's see why the stock surged, and whether it still has room to run.
A light at the end of the tunnel
Ambarella's revenue fell 10% to $56.4 million during the quarter, but rose 19% sequentially and beat estimates by over $4 million. This marked the first time Ambarella's revenue rose sequentially in four quarters.
|
Metric |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
|---|---|---|---|---|---|
|
Revenue (millions) |
$62.5 |
$57.3 |
$51.1 |
$47.2 |
$56.4 |
|
YOY growth |
(13%) |
(36%) |
(28%) |
(17%) |
(10%) |
YOY = Year-over-year. Source: Ambarella quarterly reports.
Ambarella expects that momentum to continue with revenue of $63 million to $67 million in the third quarter -- which equals 12%-19% sequential growth and 10%-17% annual growth. That rosy forecast indicates that its two-year losing streak is finally ending.
Ambarella attributed its second-quarter growth to robust sales of its security camera SoCs in China and global market share gains for its security SoCs. That growth offset the sequentially flat growth of its automotive business and its declines in other markets like drones and other consumer-oriented devices.
For the third quarter, Ambarella expects revenue from all its segments -- led by the auto and security sectors -- to grow sequentially. It expects the consumer electronics market to remain volatile, but to decrease as a percentage of its sales over the next two to three years. It also expects its revenue to keep rising in the second half of 2020.
Image source: Getty Images.
Contracting margins and unpredictable headwinds
However, Ambarella's adjusted gross margin still contracted sequentially and annually to 58.1% during the second quarter, due to a higher mix of lower-margin SoCs for Chinese security camera makers, higher supply chain costs, and rising tariffs.
|
Metric |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
|---|---|---|---|---|---|
|
Gross margin |
61.4% |
60.9% |
60.6% |
59.6% |
58.1% |
Non-GAAP basis. Source: Ambarella quarterly reports.
It expects those pressures to persist in the third quarter and reduce its adjusted gross margin to 56%-58%.
Ambarella also faces several uncertain headwinds. Two of its top security camera customers in China, Hikvision and Dahua, are both being scrutinized by U.S regulators. The escalating trade war could force those OEMs, and other Chinese companies, to buy SoCs from Chinese chipmakers instead.
Ambarella is diversifying away from image processing SoCs with its computer vision chips for cars, but it faces stiff competition in that market from Intel, which expanded its presence in the IoT (Internet of Things), computer vision, and automotive markets with its acquisitions of Mobileye and Movidius.
Ambarella's net loss still widened year-over-year from $6.9 million to $10.2 million during the quarter. However, its adjusted EPS of $0.21 -- which excludes stock-based compensation and other one-time expenses -- still beat expectations by $0.19.
Ambarella didn't provide any bottom-line guidance, but it expects its operating expenses to rise 11%-19% sequentially as its revenue growth accelerates again.
The valuations and verdict
Wall Street still expects Ambarella's revenue and earnings growth to stay negative this year. But for fiscal 2021, which starts next February, analysts expect Ambarella's revenue and adjusted EPS to rise 11% and 32%, respectively.
Based on those forecasts, Ambarella trades at about 90 times forward earnings and seven times next year's sales. Those valuations remain lofty relative to Ambarella's growth, and don't properly reflect its contracting margins, trade war headwinds, and competitive threats from Intel.
Ambarella's rebounding revenue is encouraging, but it's not out of the woods yet. Therefore, investors should stay on the sidelines until more flickers of life appear.
