Nvidia stock has been one of the biggest winners of the artificial intelligence (AI) revolution in the past couple of years, clocking remarkable gains of nearly 800% over the past two years on account of the red-hot demand for its data center graphics cards, but the past three months have been difficult for the chipmaker.
Shares of the semiconductor giant are down 1% over the past three months. That's a bit surprising considering that Nvidia delivered an outstanding set of results during this period that beat Wall Street's expectations. What's more, Nvidia's guidance was also better than what analysts were looking for.
NASDAQ: NVDA
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However, concerns about Nvidia's ability to sustain its outstanding growth, its valuation, and the short-term margin pressure that will be created by the ramp-up of its latest generation of Blackwell processors seem to be weighing on the company's stock price. Meanwhile, two other little-known chip companies have received a big boost in the past three months thanks to the positive impact of AI on their businesses: Ambarella (AMBA +4.01%) and Lumentum Holdings (LITE +5.28%).
While Ambarella stock has jumped 25% in the past three months, Lumentum has appreciated nearly 23%. Their gains have been better than what Nvidia has delivered during this period, and the good part is that the AI-focused growth drivers of both of the smaller chipmakers are just kicking in.
Let's check out how AI is turning out to be a catalyst for Ambarella and Lumentum.
1. Ambarella
The chips that Ambarella designs are deployed in automotive and Internet of Things (IoT) applications. The company is primarily known for its computer vision chips that process images and video, and it is now finding applications in the field of AI as well. According to one estimate, the size of the AI computer vision processor market could grow from $17.2 billion in 2023 to $45.7 billion in 2028 thanks to the growing demand from multiple verticals such as automotive, security and surveillance, and consumer electronics applications.
NASDAQ: AMBA
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Ambarella's product portfolio already includes chips capable of processing AI workloads in these applications. For instance, the company's CV5 processor that's based on an advanced 5-nanometer (nm) process node can run AI-based algorithms in automotive cameras, consumer cameras, and even robotics. Not surprisingly, the company is witnessing an increase in demand for this processor.
CEO Fermi Wang remarked on the company's November 2024 earnings conference call that its new higher-priced AI inference processors, such as the CV5, are driving record AI revenue and also contributing toward a higher average selling price (ASP). The good part is that Ambarella expects the robust demand for CV5 to continue in fiscal 2026, which will begin next month. Additionally, the company estimates that the demand for its CV7 family of AI vision processors will pick up from the new fiscal year.
More importantly, this solid demand is translating into outstanding growth for Ambarella. Its revenue in the third quarter of fiscal 2025 (which ended on Oct. 31, 2024) increased an impressive 63% year over year to $82.7 million. The chipmaker also swung to an adjusted profit of $0.11 per share from a loss of $0.28 per share in the year-ago period.
Ambarella's fiscal Q4 guidance of $78 million would translate into a 51% increase in its revenue from the year-ago quarter. The company is on track to finish fiscal 2025 with total revenue of $279 million, which would be a 23% improvement from the previous fiscal year. Its loss is expected to shrink to $0.30 per share from $0.83 per share in fiscal 2024.
As the following chart shows, Ambarella's top and bottom lines are on track to improve further over the next couple of fiscal years, with the company expected to report an adjusted profit per share in fiscal 2027.
AMBA Revenue Estimates for Next Fiscal Year data by YCharts
The overall AI computer vision market is set for impressive growth over the next three years, so it won't be surprising to see Ambarella deliver the healthy growth that Wall Street is expecting from it. The company could be able to sustain its positive momentum for a longer period as well since it claims to have an automotive revenue pipeline of $2.2 billion through fiscal year 2031.
If you throw in the prospects of AI computer vision processors in other areas such as consumer cameras and security applications, Ambarella may have enough room to grow its business significantly in the long run.
2. Lumentum Holdings
The growing demand for high-speed data transmission in AI servers is driving robust growth in the networking equipment market. According to Morningstar, the spending on generative AI networking equipment could increase at an annual rate of 34% between 2023 and 2028, generating $34 billion in annual revenue at the end of the forecast period.
NASDAQ: LITE
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Lumentum Holdings is already benefiting from this trend, witnessing a nice turnaround in its financial performance last quarter. The company's revenue in the first quarter of fiscal 2025 (which ended on Sept. 28, 2024) increased 6% year over year to $337 million. While that may not seem very impressive at first, investors should note that Lumentum's top line was down 23% in fiscal 2024 owing to soft demand from the cloud and networking and industrial segments.
However, things have started changing for the better thanks to AI. Its cloud and networking revenue jumped 23% year over year in fiscal Q1 2025, offsetting the weakness in the industrial business. With cloud and networking now producing nearly 84% of Lumentum's top line, this business is set to drive stronger growth for the company.
Lumentum points out that its cloud customer base is growing with the addition of new hyperscale customers that are placing orders for its lasers that are used in fiber-optic cables to enable high-speed data transmission in AI servers. What's more, Lumentum is busy expanding its manufacturing capacity so that it can fulfill more orders.
These favorable developments explain why Lumentum's revenue estimate of $390 million for the current quarter would again be an improvement of 6% over the prior year. Even better, analysts are expecting the company's growth rate to improve as the year progresses. Consensus estimates are projecting a 17% jump in Lumentum's revenue for fiscal 2025 to $1.59 billion, which is expected to be followed by even stronger growth in the next fiscal year.
LITE Revenue Estimates for Current Fiscal Year data by YCharts
The robust top-line growth is expected to filter down to the bottom line, with Lumentum's earnings expected to jump by 56% in the current fiscal year to $1.58 per share followed by healthy growth in the next couple of years as well.
LITE EPS Estimates for Current Fiscal Year data by YCharts
It won't be surprising to see the market rewarding this tech stock with more upside thanks to its improving earnings power. That's why it isn't too late for investors to buy Lumentum Holdings as its cloud and networking business seems set for better times ahead thanks to AI.
