It has been a volatile return ride for investors in Ambarella ( AMBA 0.08% ) so far this year, but the general trend has been positive. Shares are up over 60% in 2019 compared with a 24% increase in the broader market.
Most of those gains came following the video tech specialist's second-quarter earnings report that, while showing little progress toward profitability, demonstrated that Ambarella is gaining a foothold in some promising emerging fields like artificial intelligence.
The company will have an opportunity to build on that momentum when it announces third-quarter results on Monday, Nov. 25, but the bar has been set high for a solid report from CEO Fermi Wang and his team. Let's take a look.
Returning to growth
Ambarella's sales have been shrinking for more than a year, but last quarter's report suggested that this trend could finally be ending. Revenue fell 10% to mark a welcome improvement from the prior quarter's 17% slump. The company benefited from firming demand in its security camera and autonomous driving niches, which nearly offset plunging sales in consumer-focused segments like drones and sports cameras.
More gains in these key areas should support sales of around $65 million, according to management's outlook, which would mark the first time that Ambarella notched year-over-year quarterly revenue gains since late 2017. That positive result seems likely, but investors will also want to see signs this week that the growth is both sustainable and protected from the trade war between the U.S. and China.
Computer vision bets
Management has been talking up its shift toward computer-vision chip technology as a pillar of its turnaround strategy. So far, investors haven't had much to go on in looking to judge that potential, but that changes this week. The tech stock started mass production of its system-on-a-chip product in the second quarter, and this week we'll learn important details about the demand for this technology and whether Ambarella's innovations are providing solid value for manufacturers.
For clues to that success, follow gross profit margin, which is expected to land at around 57% of sales. That result would mark a worsening earnings profile when compared with the prior quarter and the prior-year period. But investors will be happy to accept that short-term drop if it positions the company for a bigger sales base and rising profit margins in the future.
The biggest factor driving the stock's reaction this week will be management's outlook, and how well it conforms with investor expectations. As it stands today, Wall Street is predicting sales will rise by about 9% in the fiscal fourth quarter, which would put Ambarella at a near-flat result for the full year, constituting a win compared with significant declines in each of the last two years.
For investors to believe the company has put those struggles behind, they'll need to see signs that sales growth is accelerating into 2020 and that Ambarella is at least on a path toward profiting from its expensive push into new tech niches like computer vision. Given the stock's rally in recent months and its pricey valuation, that's exactly what investors are expecting to learn on Monday.