Investors were bracing for bad news when Ambarella (AMBA 3.89%) reported its fiscal second-quarter results, and that's exactly what they received. The computer vision tech specialist reported nearly flat sales through late July and expanding losses thanks to major supply chain challenges.
Some of these pressures are finally easing, which means Ambarella could see some improvement by late 2022. But there are some reasons to be cautious about the stock right now. Let's dive right in.
The good news
Ambarella's Q2 sales rose 2%, marking a sharp slowdown from the prior quarter's 29% spike. It was jarring to see a growth stock's revenue barely budge from the prior year's $79 million. Most of that slowdown can be pinned on the demand and supply chain challenges associated with widespread pandemic shutdowns in China.
However, the company is now past these issues, executives said in a conference call with Wall Street analysts. "We absorbed the worst from both the China lockdown and the 14-nanometer shortage," CEO Fermi Wang explained.
More good news is that the company's relatively new computer vision platform continues to find traction in niches like autonomous driving. The platform promises to boost margins and support growth over the next several years, so it was encouraging to see solid gains there.
The bad news
The business isn't likely to see a quick rebound toward faster growth in the next few quarters. In fact, sales should fall to around $83 million in Q3, down from $92 million a year earlier. The problem is that just as China's lockdowns eased, many of Ambarella's biggest customers decided to slow their ordering to reduce inventory holdings.
AMBA Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
The company is still generating net losses, too. In fact, losses have expanded to $35 million over the last six months, compared to $18 million a year ago. That alone helps explain why the stock has trailed the market so badly in 2022.
Looking ahead
However, Ambarella's future is mostly about its next iterations of computer vision chips currently being tested by some potentially big customers. Investors who believe in these new releases might want to take advantage of the stock price slump to own a piece of the company while waiting for growth to accelerate as more computing products demand video-processing capabilities in small packages.
Management talked up the latest model, saying it delivers market-leading performance requiring minimal power -- a valuable combination for manufacturers in the autonomous-driving niche. But most investors might prefer to wait for more concrete signs that Ambarella is on a path toward sustainable profitability.
It is encouraging that net losses are moderating, and sales trends should stabilize over the next several quarters. But it might be mid-2023 before shareholders have a clear picture of important metrics like operating profit margin. As a result, you might want to look elsewhere in the semiconductor space for your next stock buy.
