Market Sell-Off: 1 Beaten-Down Tech Stock You May Regret Not Buying Hand Over Fist

The stock market is having a challenging year for multiple reasons, including high interest rates, surging inflation, and the possibility of a recession. This largely explains why major indices such as the S&P 500 and the Dow Jones Industrial Average are down 18% and 14%, respectively, in 2022.

Semiconductor stocks have been hit particularly hard amid this sell-off, with concerns of a slowdown in chip demand adding to the gloom. The PHLX Semiconductor Sector index is down a whopping 34% in 2022, underperforming the other indices by a huge margin. Not surprisingly, chipmakers such as Ambarella (AMBA -1.87%) that were flying high in 2020 and 2021 are down in the dumps this year.

In fact, Ambarella stock is more than 70% in 2022. Its recent results haven't been inspiring, and the near-term outlook is tepid. But savvy investors may want to keep an eye on the stock and buy it while the market is in sell-off mode. Let's find out why.

The short-term outlook isn't great

Ambarella released fiscal 2023 second-quarter results (for the three months ending July 31, 2022) on Aug. 30, and investors didn't like what they saw. Ambarella stock fell more than 7% in extended trading following the release of the results as the company's outlook fell behind Wall Street's expectations.

The company, whose chips are used in vehicles and security cameras, reported just 2% year-over-year growth in revenue last quarter to $80.9 million. COVID-related lockdowns in China disrupted Ambarella's supply chain last quarter and weighed on its performance. Adjusted earnings fell to $0.20 per share from $0.35 per share in the year-ago period thanks to a sharp spike in operating expenses.

Ambarella's total operating expenses jumped nearly 29% year-over-year thanks to higher stock-based compensation, as well as the company's investments in infrastructure for new products. It is worth noting that Ambarella's non-GAAP gross margin remained robust with a reading of 64.5%, up 1.7 percentage points from the year-ago quarter.

The guidance, however, sparked panic among investors. Ambarella expects $83 million in revenue this quarter at the midpoint of its guidance range, while adjusted gross margin is expected to land between 63% and 64%. For comparison, Ambarella delivered $92.2 million in revenue in the prior-year period, along with an adjusted gross margin of 63.1%. CFO Brian White attributed the top-line weakness to a slowdown in demand. He said on the latest earnings conference call:

While we expect some improvement in the second half from the broad supply chain disruptions, we have started to see some customers reduce the amount of inventory they're willing to carry into year-end, in particular, as component lead times contract.

The weak demand environment is expected to restrict Ambarella's top-line growth to just 5.3% this year, according to analysts' estimates. Earnings, meanwhile, are expected to contract to $1.22 per share from $1.61 per share in fiscal 2022. But its fortunes are expected to turn around from the next fiscal year.

Ambarella's weakness shouldn't last long

Ambarella's chips power artificial intelligence (AI)-powered cameras that can be deployed for security applications and in vehicles. The chipmaker has already gained impressive traction in this space, as evident from the solid growth in the shipments of its computer vision (CV) chips.

Ambarella management says that the company has "cumulatively shipped more than 10 million" CV chips so far. The company estimates that CV chips will account for 45% of its top line this year. It wouldn't be surprising to see this market move the needle in a bigger way for Ambarella in the long run given the massive growth opportunity present in this space.

The computer vision market is expected to clock annual growth of nearly 40% through 2030, generating $207 billion in revenue at the end of the forecast period, according to Allied Market Research. The CV market's terrific growth will be primarily driven by the adoption of AI in the automotive and consumer electronics markets.

Ambarella is already in a solid position to take advantage of this massive growth. Several automakers, including the likes of BMW, Toyota, and Rivian, are already using Ambarella's chips, along with several other start-ups across the globe. The company's CV chips are also being deployed in smart homes as well as industrial applications.

All this explains why analysts expect Ambarella's growth to pick up the pace from next fiscal year.

Source: YCharts

What's more, the company is expected to clock 16% annual earnings growth for the next five years, but the terrific opportunity it is sitting on could help it grow at a faster pace. As such, investors shouldn't miss the opportunity to accumulate this semiconductor stock if it keeps falling amid the market sell-off, since it could turn out to be a big winner in the long run.