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Ambarella Returns to Growth

By Demitri Kalogeropoulos – Dec 3, 2019 at 11:45AM

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The video chip specialist still sees plenty of volatility ahead, though.

Despite concerns over Chinese trade issues, investors were optimistic heading into Ambarella's (AMBA -3.49%) third-quarter earnings results. The tech company, which develops video processing chips found in security cameras and autonomous-driving systems, has been marching back toward sales growth following its pivot away from consumer-focused products. Shareholders are even more excited about the potential for Ambarella's new computer vision systems.

Last week, the company announced results that supported that positive growth narrative even as short-term losses continued. Let's take a closer look.

A engineer works on a computer chip.

Image source: Getty Images.

Good growth

Sales rose 19% to $68 million to mark Ambarella's first year-over-year increase since late 2018 when it began pivoting away from its focus on consumer products like GoPro action cameras. The revenue total also surpassed management's guidance that in August predicted roughly $65 million in third-quarter sales.

Executives were pleased that this growth came despite tariff challenges and issues related to market access by some of its Chinese customers. "Despite the geopolitical and trade uncertainties," CEO Fermi Wang said in a press release, "we demonstrated continued progress toward our transition to a video and [artificial intelligence] company."

Finances and outlook

Ambarella's shift toward that new computer vision future didn't come cheap. Gross profit margin fell to 56.5% of sales from 58.5% a year ago and selling costs expanded. As a result, the company posted another net loss. The good news is that losses moderated, shrinking over 50% to $4.3 million from $9 million last year. That translated into a per-share loss of $0.13 compared to $0.28 a year ago.

The company still sees trade issues complicating its growth profile in the fourth quarter and likely into fiscal 2020, but not so much that these challenges threaten the positive momentum. In fact, Ambarella predicted a 12% sales increase in Q4, which edged past the 9% uptick that most investors who follow the stock had been targeting.

Hitting that figure would return the tech company to annual sales growth in 2019, but by the slimmest of margins. That success only represents a small step toward the bigger growth that investors are hoping for, given the stock's pricey valuation. The bright outlook assumes Ambarella will gain a defensible foothold in the emerging computer vision market, for example. With just 50 customers added in that niche this past quarter, it's too soon to tell whether artificial intelligence will be the sustained market share win that management is aiming for.

As a result, investors will be watching growth and profitability trends over the next few quarters for confirmation that Ambarella has really put its past sales struggles behind it and can look forward to accelerating revenue growth in 2020 and beyond. Unfortunately, that picture will likely be clouded by world trade challenges, meaning shareholders will have to endure lots of volatility in the stock price as Wall Street tries to judge whether Ambarella is on the right track in its recovery initiatives.

Demitrios Kalogeropoulos 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.

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