Supply chain challenges finally caught up with Ambarella (AMBA 0.15%): Shares of the company whose chips power automotive and security cameras slipped 2% following the May 31 release of its fiscal 2023 first-quarter results (for the three months ending April 30, 2022).
Investors were quick to press the panic button despite the terrific growth in Ambarella's revenue and earnings last quarter, as the company's guidance points toward a slowdown in growth in the current quarter. Let's see what's plaguing Ambarella and why it would be a good idea to look past the short-term challenges that the company is facing.
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Ambarella succumbs to supply chain troubles
Ambarella's fiscal Q1 revenue jumped 29% year over year to $90.3 million, which was slightly ahead of consensus estimates. The chipmaker's adjusted gross margin expanded by 90 basis points over the prior-year period to 63.8%, thanks to an improvement in the average selling price of its chips.
The company's healthy top-line growth and margin expansion led to a 91% year-over-year increase in its non-GAAP earnings to $0.44 per share, which was well ahead of the $0.36-per-share consensus estimate. Ambarella enjoyed impressive traction in the automotive market last quarter. Its computer vision chips were selected by several original equipment manufacturers (OEMs) and automakers to power driver assistance applications and in-cabin monitoring systems.
Ambarella's chips are being used by the likes of Honda, Isuzu, Geely, and Dongfeng in their vehicles. Meanwhile, the company is gaining traction in the Internet of Things (IoT) market, where its chips are being used to power cameras for smart homes and other enterprise and public security applications.
However, Ambarella's guidance was enough to undo all the good work the company did last quarter. It expects $80 million in revenue in fiscal Q2 at the midpoint of its guidance range, which missed the consensus estimate of $91.5 million by a big margin. Non-GAAP gross margin is expected to land at 63.5%. For comparison, Ambarella had reported $79 million in revenue in the second quarter of fiscal 2022, with an adjusted gross margin of 62.8%.
So Ambarella's hot revenue growth streak is anticipated to come to a halt this quarter. But that's because of factors out of the company's control and not because of a dip in demand. Ambarella had already warned about potential supply chain problems earlier this year, and CEO Fermi Wang confirmed the same on the latest earnings conference call: "During Q1, the pandemic flared up in China, and the resulting lockdown disrupted customer production schedules and orders placed on us, as well as logistics in the greater Asia supply chain. A majority of our customers' products are manufactured in this region and subject to impacts from China-related supply chain disruptions."
The good part is that Ambarella sees an improvement in the supply chain in the second half of the fiscal year.
The chipmaker could step on the gas
Ambarella's growth could gain momentum considering the lucrative markets it serves.
For instance, the demand for computer vision chips that are used in automotive cameras should keep improving. That's because the number of cameras per vehicle is increasing rapidly to support autonomous driving applications. Ambarella estimates that future vehicles could have as many as 20 cameras to support Level 5 autonomy as compared to a maximum of eight cameras that are currently deployed in a vehicle such as the Tesla Model X/S to support Level 2 autonomy.
This explains why Ambarella sees its serviceable addressable market within the automotive business approaching $7.5 billion in fiscal 2028 as compared to just over $2.5 billion this fiscal year. Meanwhile, the chipmaker expects its IoT addressable market to near $3 billion by fiscal 2028 from an estimated $1.5 billion this fiscal year.
Now, Ambarella is expected to generate $385 million in revenue this fiscal year, according to analysts' estimates, which means that the company has a lot of room to grow its business, as the size of its end markets indicates. More importantly, Ambarella has built a solid base of customers already that should help it translate the addressable opportunity into actual revenue. The likes of Mercedes-Benz, Ford, Rivian, Renault, and Toyota are some of the names that are partnering with Ambarella to develop their vehicles.
As such, the demand for Ambarella's chips can be expected to remain healthy in the long run, which is why investors should look past the near-term headwinds that the company is facing. What's more, the stock's post-earnings drop means that savvy investors can buy it at a more attractive level.
Shares of Ambarella are trading at 8.7 times sales, which is lower than their five-year average sales multiple. A drop in the company's stock price will make it more affordable, and that would present an opportunity to buy a fast-growing semiconductor specialist with impressive long-term potential on the cheap.
