Ambarella (AMBA +0.19%) looked all set to crush Wall Street's expectations going into its fiscal 2022 third-quarter results, and the company didn't disappoint, sparking a terrific surge in its stock price. Share prices of the company, whose computer vision chips are used in automotive and Internet of Things-enabled security cameras, gained more than 13% in aftermarket trading on Tuesday the day its results were released.
Let's look at Ambarella's quarterly numbers and see why the stock could soar higher after its latest results.
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Ambarella crushes expectations
Ambarella's Q3 revenue shot up 64% year over year to $92.2 million, while non-GAAP net income jumped to $0.57 per share from the prior-year period's figure of $0.09 per share. Analysts were looking for $0.49 per share in earnings on $90 million in revenue. A richer product mix and an increase in the number of customers moving from the design win phase to the production phase helped Ambarella outperform expectations.
It is worth noting that Ambarella put up such terrific numbers despite supply chain challenges. The company pointed out on its latest earnings conference call that component shortages are affecting its results. But at the same time, there are some positive developments, such as improved supply from Ambarella's foundry partner Samsung.
This explains why Ambarella delivered healthy guidance for the fourth quarter as well. The company expects $90 million in revenue at the midpoint of the guidance range in the current quarter, along with a non-GAAP gross margin of 63.5% and adjusted operating expenses of $40 million. This exceeded Wall Street's expectations of $88.2 million in revenue.
Ambarella's guidance points toward healthy year-over-year growth, as it generated $62 million in revenue in the year-ago period and posted a non-GAAP gross margin of 61.4%. Its operating expenses stood at $51.8 million in the prior-year period. So the projected year-over-year increase of 45% in revenue, fatter margins, and lower expenses should help Ambarella deliver eye-popping earnings growth in the fiscal fourth quarter as well.
More importantly, Ambarella looks well placed to maintain its outstanding growth in the long run thanks to the growing size of the markets it operates in.
The chipmaker is built for long-term growth
As pointed out earlier, Ambarella's chips are used in automotive and security cameras. The good part is that the usage of these chips is growing at an impressive pace and powering Ambarella's growth. This is evident from the comments made by Ambarella CEO Fermi Wang on the conference call:
During Q3 the number of unique CV customers in production grew sequentially and quadrupled versus a year ago. As of today, on a cumulative basis, we have shipped more than 5 million CV SoCs including more than 1 million into the automotive market. Our automotive revenue funnel is expanding. A year ago, we announced a six-year, discounted, automotive revenue funnel of about $600 million, and using the same methodology, this figure has approximately tripled.
More specifically, Ambarella had a design win pipeline worth $600 million in the automotive market in October 2020. The company had already won 65% of that design win pipeline, which means that automakers had approved its chips for use in their products. Those design wins are driving its outstanding growth as more customers bring Ambarella-powered cameras into production.
And now the company says that the design win pipeline has tripled, which means that it is sitting on a potential $1.8 billion revenue opportunity in the automotive market. Ambarella will provide more details about this massive pipeline at an investor event in early January next year. However, investors shouldn't forget that this sizable spike in the design win pipeline bodes well for the company's future considering that it is on track to generate just over $330 million in revenue this fiscal year.
The huge end-market opportunity and Ambarella's ability to turn that into top- and bottom-line growth tell us why the company's results are expected to keep improving at a nice pace in the coming years.
| FY 2022 | FY 2023 | FY 2024 | |
|---|---|---|---|
| Revenue estimate | $331 million | $398 million | $490 million |
| Earnings per share estimate | $1.57 | $1.92 | $2.62 |
Source: YCharts. FY = fiscal year.
Ambarella is a richly valued stock that trades at a whopping 96 times forward earnings and nearly 24 times sales. But if it can keep up its sizzling growth and beat investors' expectations going forward -- which it seems capable of doing -- then it can justify its rich valuation and remain a hot growth stock.
