Shares of computer vision (CV) chip designer Ambarella (AMBA 1.32%) have been on a tear. The stock is up nearly 60% over the past year, and it could continue its run as the company returns to growth mode. Specifically, self-driving vehicles and additional auto safety features could be a huge catalyst for this small semiconductor stock. Here's some of what it had to say during its first-quarter earnings update in early June.

A return to growth is just getting started

Ambarella was negatively affected by the pandemic last year. In fact, effects from COVID-19 compounded issues from the U.S.-China trade war of a couple of years ago, and the company's revenue over the last 12 months remains down about a third from all-time high sales notched in 2017. In spite of the negative financials, though, shares rose over the last year on positive progress in CV chip development -- especially among automakers, as tens of millions of cars are sold every year worldwide and most of them could feature advanced driver assist functions that make use of CV chips.  

A person in the driver's seat of a self-driving car uses their smartphone while in traffic.

Image source: Getty Images.

A real turnaround is starting to unfold. After taking a 3% full-year sales tumble last year, Ambarella got its new fiscal year started on the right foot. During Q1 (the three months ended April 30), revenue was $70.1 million, topping guidance provided a few months earlier and up 28% from the year prior as the auto industry quickly recovers from pandemic effects last spring. Adjusted net income (which excludes employee stock-based compensation) was up 575% to $8.92 million. The company also ended the period with a sizable war chest: $436 million in cash and equivalents and no debt. That's about eight quarters' worth of operating expenses on hand at the Q1 annualized run rate.

The outlook for Ambarella is improving as well. Second-quarter revenue is expected to be $74 million to $77 million, representing a 51% year-over-year increase at the midpoint of guidance as the company laps depressed financial results from the start of the pandemic. This rebound in financials is already priced into the stock at this point, but demand for its newer CV chips could be teeing up years more of double-digit percentage growth if Ambarella executes on its research and development.

The evolution to a CV company is yielding early results

A few years ago, Ambarella was primarily a consumer electronics component supplier, most notably making image chips for high-end cameras like GoPro's. That's a highly competitive market fraught with wild swings in demand, so the company embarked on a transformation to become a computer vision (CV) leader. CV gives a computer system a field of vision and helps it interpret what it's seeing. Early uses for these chips include security cameras and industrial robotics and equipment, but the auto industry represents a huge opportunity as advanced driver assist systems (ADAS) and new autonomous driving features start to proliferate in new car models. 

The industry is still in early development, though. Most automakers are utilizing a combination of radar, lidar, and CV chips in their driver safety and autonomy tech. Notably, Tesla has asserted that autonomy can be accomplished with just CV, and in fact plans on building some cars without radar (Tesla currently doesn't utilize lidar in its "Autopilot" or "Full-Self Driving" systems).

If CV does continue to prove a viable option in improving self-driving vehicle features, Ambarella stands to benefit. In fact, this bet is already paying off. CEO Fermi Wang said in a June 1 company press release that Ambarella's "automotive business, led by CV, should double this year, and a multi-year period of share gains in a growing market has now likely commenced." A few months ago, Ambarella said its new CV semiconductors (still the minority of revenue) would reach 2 million in cumulative units sold by the end of Q1.

Optimistic long-term commentary indeed, and the long-term potential is there for Ambarella to continue growing at a rapid pace if vehicle autonomy continues to develop. In the short term, Ambarella's financials are improving from its development into a CV company. Guidance for the second quarter implies adjusted operating income of about $9.7 million at the midpoint of expectations, another massive improvement from negligible profitability last year.

Put simply, Ambarella is beginning to reach a profitable scale in its evolution, underpinning its efforts to develop new semiconductor tech for a potentially massive self-driving auto and AI industry. Research and development expense (excluding stock-based compensation) was $26.7 million last quarter, an amount the company can easily afford now without dipping into the cash on its balance sheet.  

Ambarella trades for 15 times trailing 12-month sales. Assuming double-digit percentage growth continues, it isn't a totally unreasonable price tag given the longer-term potential as ADAS tech becomes increasingly common. If you're interested in the autonomous vehicle industry, put this stock on your radar.