Mobileye (MBLY 2.27%) and Ambarella (AMBA 3.18%) represent two ways to invest in the growing automotive chip market. Mobileye is the world's top producer of advanced driver assistance systems (ADAS), which leverage a combination of cameras and sensors to provide semi-autonomous and autonomous driving features. These systems are powered by Mobileye's own EyeQ computer vision chips.
Ambarella is a leading producer of image processing system on chips (SoCs), which process photos and videos for cameras, drones, and other devices. Like Ambarella, it also produces computer vision chips that help security cameras, Internet of Things (IoT) devices, and connected vehicles identify people, objects, and obstacles in real time.
Image source: Getty Images.
Mobileye was spun off from Intel in an IPO last October, and its stock surged more than 30% this year and is hovering just below its all-time high. Ambarella's stock has stayed roughly flat this year and remains more than 60% below its record high. Let's see why investors embraced Mobileye but shunned Ambarella -- and if the former is still a better buy.
Mobileye faces macro and competitive headwinds
Mobileye's revenue fell 10% in 2020 as the pandemic disrupted the production of new vehicles, but grew 43% in 2021 as those headwinds dissipated. In 2022, its revenue rose another 35% as the auto sector's post-pandemic recovery continued.
Mobileye believes that as new vehicles evolve, they'll require more of its ADAS products and computer vision chips. Mobileye's newest "SuperVision" version of its ADAS platform already supports hands-free navigation capabilities for driverless vehicles, and its latest EyeQ Ultra chip is designed with fully autonomous driving features in mind.
But for 2023, Mobileye only expects its revenue to rise by 10%-13%. It blames that slowdown on the softness of the Chinese EV market, which was caused by a reduction of government subsidies for EVs and macro headwinds for big-ticket purchases.
Mobileye's production costs are also climbing as it faces intense competition from Nvidia and Qualcomm in automotive and computer vision chips. That's why Mobileye's gross margin shrank from 78% in 2021 to 75% in 2022, then contracted year over year again to just 71% in the first quarter of 2023. Analysts expect its adjusted earnings per share to decline 19% for the full year as those headwinds continue to reduce its near-term margins.
Ambarella faces a tougher slowdown this year
Ambarella mainly sells its image processing SoCs and computer vision chips to IoT and automotive customers. In fiscal 2023 (which ended on Jan. 31), it generated 75% of its revenue from IoT chips and 25% of its revenue from automotive chips.
It generated 82% of its revenue from Asia throughout fiscal 2023 (which ended on Jan. 31), and a large portion of those sales still come from China. It notably lost several of its largest Chinese clients, including the security camera makers Hikvision and Dahua, over the past few years after they were blacklisted by U.S. regulators.
Ambarella's revenue dipped by 3% in fiscal 2021 as the pandemic disrupted most of its end markets. Its revenue surged 49% in fiscal 2022 as those headwinds dissipated, but that recovery was cut short by its decelerating sales of automotive chips and IoT chips. Its revenue only rose 2% in fiscal 2023 and analysts are bracing for a 15% decline in fiscal 2024.
Ambarella blames that slowdown on inventory issues across the automotive and IoT markets, but intense competition from Nvidia, Qualcomm, Mobileye, and other larger chipmakers could also be taking a toll on its sales growth. Its adjusted gross margin expanded from 61.4% in fiscal 2021 to 63.4% in fiscal 2023, but still dipped 70 basis points year over year to 63.1% in the first quarter of fiscal 2024. Analysts expect it to turn unprofitable on an adjusted basis again for the full year.
The valuations and verdict
Mobileye isn't cheap at 65 times forward earnings and 18 times this year's sales. Ambarella can't be valued by its price-to-earnings ratio until it turns profitable again, but it seems a bit cheaper relative to its top line at 11 times this year's sales.
Nevertheless, Mobileye's dominance of the ADAS market, superior scale, stronger sales growth, and higher gross margin all make it a better buy than Ambarella right now. Ambarella is still a distant underdog in a market that requires scale to survive, and it could struggle to grow out of its niche as bigger dogs like Nvidia and Qualcomm enter the crowded market.
