What happened

Shares of Ambarella (AMBA 1.80%), a maker of specialized semiconductor chips for high-definition video, fell 15.4% through 10:20 a.m. ET on Wednesday despite beating analyst targets for both sales and earnings for the fiscal second quarter of 2023.

Heading into the quarter, Wall Street had anticipated that Ambarella would earn $0.19 per share (pro forma) on $80.2 million in sales. In fact, this morning Ambarella reported a profit of $0.20 per share on sales of $80.9 million, beating on both the top and bottom lines.  

So what

And yet, Wall Street wasn't pleased. TheFly reported four separate analyst cuts to its price target -- and one out-and-out downgrade, from Summit Insights -- in response to the news. So what did Ambarella say that was so disconcerting?  

For one thing, while sales beat expectations, they grew only 2% year over year. That was a big slowdown from the first quarter, in which Ambarella reported much stronger 29% year-over-year growth. Also, while Ambarella exceeded expectations on its pro forma earnings, the company actually lost $0.62 per share when calculated according to generally accepted accounting principles (GAAP).

And that was three times the size of the company's loss in the year-ago second quarter.  

Now what

The company also warned that its revenue, which only barely beat expectations in the second quarter, will probably miss them in the third quarter. Management is forecasting third-quarter sales ranging from a high of $85 million all the way down to perhaps as little as $81 million. Given that Wall Street is expecting no less than $85 million, this works out to Ambarella promising a sales miss next quarter, and investors can't be too pleased to hear that.

The revenue picture is deteriorating rapidly at Ambarella, and GAAP earnings are nowhere to be found. As the semiconductor market at large continues to disintegrate, Ambarella is having troubles all its own. With the stock not expected to turn GAAP profitable before 2025 (and only expected to earn $0.51 per share even then), it's hard to justify Ambarella's current $70-plus stock price.

Even after today's sell-off, Ambarella still looks like a sell to me.