This Pummeled Semiconductor Pick Has a Bright Future

The semiconductor space is predicted to slow down in comparison to last year. In this clip from "The Virtual Opportunities Show" on Motley Fool Live, recorded on March 15, Motley Fool contributors Demitri Kalogeropoulos and Travis Hoium discuss one semiconductor company that investors should keep on their radar despite its stock getting pummeled.

Demitri Kalogeropoulos: You could see another example of the stock getting pummeled lately. They reported earnings a couple of weeks ago. Like I said, it's a semiconductor chip technology company that used to be focused mainly on these low-margin video processing things, the things that would go in sports cameras, for example. But, they moved into AI and computer vision, and these CB chips they've been doing on these platforms. They're on their fourth-generation of computer vision platforms that are being used, particularly, in the autonomous driving space. That's boosted their growth and their profits. The last quarter was great. Sales were up 45%, profitability is rising, you can see there. However, the stock was down about 30% after that earnings report came out basically because Wall Street is nervous about the outlook here. Basically, the main issue is the supply chain. All of Ambarella's (AMBA 1.03%) bigger customers are running into manufacturing problems. We talked a couple of weeks ago about the semiconductor inventories being really low and not having quite enough of that. That's now moving its way through into manufacturing challenges. They're delaying a lot of their orders and that is causing Wall Street to get nervous. Then, the semiconductor space itself might slow down. In general, based on economic growth, it's predicted to slow down a little bit compared to last year or so. Management's predicting weaker growth, I guess, in the first quarter for that reason. The bigger picture though, I think, is pretty bright for the company because this computer vision platform that they have is around 20% of their sales right now and there are much higher margins in these sales. But, they think they can get it up to 40% of sales in just about a year or two. Basically, they're moving into this really high-margin space that's got a lot of growth opportunity. They do have some exciting innovation being released in the next year or so. That's a big risk in this company. They have to basically wow their customers with these innovations every year. But, they've been doing well in the last three years or so. Assuming their next-generation of computer vision platform solves those problems that these manufacturers are having then they should be fine. This is a company I'm going to be watching because it's in that interesting space of autonomous driving. They've got some really good tech, great engineering, and intellectual property in that building. I think they can do pretty well from here, particularly given that the stock's been pummeled, even though growth has been fantastic. It's all just a worry about what the next six months or so might look like. Overall, the entire story I guess around the stock could be pretty exciting to watch.

Travis Hoium: Question for you, Demitri, before we wrap this up. They were for a long time basically trading in lockstep with GoPro (GPRO -1.98%) because that was their biggest customer. If they're moving into these things like self-driving technologies, are they just trading one problem for the next problem? It's one of those weird things like, if you get locked in with a customer and your chip is designed into their product, that can be a really good thing unless that customer goes down the tube. It's like this strange dynamic where you're reliant on somebody else for your success. I don't know. I'm trying to wrap my head around what to think about this company because I haven't looked at it for a while, but I know back when they were really tied to GoPro, that was really the risk, and now are they just trading one risk for another?

Kalogeropoulos: Exactly. Particularly with a small sales base, that's a big challenge for them. They basically erased that challenge. They don't have any customer that takes a massive portion of their business, No.1. That's why they moved into this platform. That's one of those situations where a near-death experience can make a company a lot better. I think they made the right move in that case. Not only are they moving to diversify into areas, they've got a huge security camera platform that's very popular. That's basically more than half of their sales right now too. Anyone who needs to put security cameras and facial recognition and processing that data really well and using AI to figure that part out, that's a good platform for them too and it's really diverse in terms of where that goes. But yeah, you're right. That's something to definitely look out for. It's going to get better as the company's sales growth continues as it expands. But it's a risk, particularly because it's one of the smaller ones in the industry.