What happened

Shares of computer vision chip designer Ambarella (AMBA 2.35%) were up 7.4% last week, according to data from S&P Global Market Intelligence. This performance handily outpaced about a 4.5% decline for semiconductor stocks overall, as measured by the iShares Semiconductor ETF (SOXX 4.26%).  

However, Ambarella remains more than 50% down from its all-time highs reached at the end of 2021, compared with iShares Semiconductor ETF, down just 13%. Ambarella stock has been due for a relief rally, and this past week's performance provided one.  

Woman in a self-driving car using a smartphone.

Image source: Getty Images.

So what

Let's not completely chalk up Ambarella's recent short-term outperformance to market forces alone. The company reported a solid conclusion to its 2022 fiscal year (which ended in January) a month ago. Full-year sales rocketed 49% higher, and adjusted net income was $62.2 million, compared with just $11.9 million the year prior.  

Ambarella's secret sauce right now is building momentum in the auto market. Its lineup of computer vision (CV) chips, which give a computing system the ability to "see" and understand its surrounding environment, are used in things like security cameras and industrial robotics. But with many automakers beginning to implement advanced driver assist features in their vehicle lineups, Ambarella sees a much bigger market for its CV hardware in the years ahead.  

Last year, management said about one-quarter of its sales were CV chips, with the majority of revenue coming from older image and video processors. This year, Ambarella thinks CV will comprise 45% of total sales.

Now what

Ambarella is a small player in the semiconductor industry, with an enterprise value of just $3.7 billion. However, CV chips could be an integral piece of the broader AI market. Giving machines the ability to make sense of their surroundings has tremendous potential, and not just for autonomous vehicles. Ambarella is an early tech pioneer in this space, supplying electronics hardware and an accompanying software stack to help give computers sight.  

Bear in mind this small chip company has historically been very cyclical. It makes money from the sale of hardware, and these sales ebb and flow based on the pace of investment from its customers, strength in consumer spending, and the like. Revenue growth is expected to cool off a bit, with management projecting a 26% to 31% year-over-year increase during the first quarter. But with auto market potential on the rise, be sure to keep Ambarella on your watch list.