The last year was a pivotal one for video chipmaker Ambarella (NASDAQ:AMBA). After bankrolling some serious coin for a few years from the action camera market, the small hardware maker has been transitioning to more stable commercial and industrial breadwinners like security cameras and automotive technology. That meant an extended period of declining sales, but fiscal 2020 (the 12 months ended January 31, 2020) saw the end of that.

AMBA Chart

Data by YCharts.

For its latest challenge, Ambarella will need to overcome supply chain disruption (and perhaps some lost demand) due to coronavirus. The company still expects that some growth lies ahead, and the longer term is especially promising, but I'm still not quite ready to swoop in and buy this premium-priced technology stock.

Pricey from a backward-looking viewpoint

Ambarella's revenue and adjusted earnings per share fell 23% and 69%, respectively, in fiscal 2019, and fiscal 2020 didn't start much better. Sales continued to fall in the first two quarters, but mounted a strong comeback during the second half of the year.

After all was said and done, total revenue for fiscal 2020 finished virtually unchanged at $229 million, compared with $228 million the year prior.  

Period

Revenue

Increase (Decrease)

Q1 2020

$47.2 million

(17%)

Q2 2020

$56.4 million

(10%)

Q3 2020

$67.9 million

19%

Q4 2020

$57.2 million

12%

Expected Q1 2021

$52.0 million to $57.0 million

10% to 21%

Data source: Ambarella.  

However, in spite of the sales rally, the company's adjusted earnings (which backs out stock-based employee compensation and other non-recurring items) fell 5% from the year prior. The good news is that management thinks the rebound will continue to kick off the new fiscal year, as its new computer vision and AI-enabled chips are gaining momentum with security camera and automotive equipment manufacturers. If that momentum can be sustained in the year ahead, the bottom line should begin to improve.  

Nevertheless, based on one-year trailing adjusted earnings per share of $0.69, Ambarella stock trades for a hefty 66.7 premium. The stock also currently goes for a more reasonable 38.2 times one-year free cash flow (what's left after basic operating and capital expenses are paid), but it's still a high price for a company that has been attempting to reestablish growth for a few years now.

A closeup picture of a camera lens with the aperture opened slightly.

Image source: Getty Images.

Foggy but promising from forward-looking guidance

Of course, it's all about the future when it comes to purchasing stocks, so valuing Ambarella based on its potential is far more important than the past.

Despite all the worry going on in the world at the moment (coronavirus, a cratering energy market, and subsequent fear of global recession), it's encouraging that the video chipmaker's top team expects growth -- although it admits there is a wide range of outcomes due to the uncertainties lurking for the economy.

However, while the top line appears to have reestablished an uptrend, earnings could still be under pressure. Gross profit margin on product sold is expected to be 57.5% to 59.5% (compared with 59.6% in the first quarter a year ago), and adjusted operating expenses should be $33.0 million to $35.0 million (compared with $29.6 million a year ago).

Thus, in the near-term, an all-out rebound for the bottom line looks unlikely given Ambarella's near term financial outlook. That means the stock remains at premium pricing on a forward-looking basis.

However, it is worth bearing in mind that the company's AI and computer vision chip rollout is still in the early stages of monetization. CEO Fermi Wang has said these new chips should become material to the overall revenue picture in three waves: Professional security cameras, which will start contributing this year; home monitoring and security, which should become material next year; and the automotive industry, which should start kicking in within the next two years as auto manufacturers and part suppliers are in the early testing stage of making use of Ambarella's wares.  

Thus, it looks like Ambarella's computer vision chip revolution won't get started until later this year, with perhaps 2021 looking like a more likely possibility for the next-gen hardware to start really moving the needle. Even with sales looking like they will move higher in the first quarter, earnings aren't going to rebound as much capped.

Thus, I'm still waiting for cheaper prices (like if the stock dips below $40 a share) before I start to nibble on this semiconductor stock again.