Wolfspeed (WOLF +0.00%) was once a red-hot chip stock. The company had established an early-mover advantage in silicon carbide chips, which can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. That resilience makes them well-suited for a broad range of 5G, military, green energy, and EV technologies.
But over the past two years, Wolfspeed's stock price plunged more than 90%. The bulls retreated as rising interest rates throttled the growth of the green energy and EV markets while making it more expensive for the chipmaker to expand its plants. The tech war also drove the U.S. to sanction Chinese silicon carbide devices and China to ban exports of gallium and germanium, which are used in producing such chips.
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Wolfspeed has been pruning its workforce, restructuring its business, and reining in its expansion plans to cope with that slowdown. Its board also fired its CEO Gregg Lowe in November and hasn't hired his permanent successor yet. For now, analysts still expect its revenue to dip 2% in its fiscal 2025 (which ends in June) as its net loss widens.
All of those issues suggest that it could take a long time for Wolfspeed's stock to bounce back. And trading at 8 times this year's sales, with an enterprise value of $6.2 billion, it still doesn't look cheap. So instead of buying Wolfspeed as a turnaround chip play, it might be smarter to invest in Ambarella (AMBA 0.92%), which is less valuable but faces fewer near-term headwinds.
What does Ambarella do?
Ambarella produces image processing systems-on-a-chip and computer vision chips for security cameras, drones, connected vehicles, and other devices. Its chips enable cameras to process higher-quality photos and videos at higher speeds.
Over the past few years, Ambarella faced three main headwinds. First, U.S. regulators barred the company from selling its chips to some of its top security camera customers in China, citing national security concerns. Second, its Internet of Things (IoT) and automotive markets cooled off amid more challenging macroeconomic conditions. Lastly, it faced competition from other computer vision chipmakers such as Mobileye, Intel's Movidius, and Qualcomm.
NASDAQ: AMBA
Key Data Points
As it grappled with these challenges, Ambarella's revenue grew just 1.7% in fiscal 2023 (which ended Jan. 31, 2023) and declined 32.9% in fiscal 2024. But for fiscal 2025, analysts expect its revenue and adjusted earnings to grow by 23% and 64%, respectively.
That robust growth is being driven by its automotive and IoT businesses (which stabilized as benchmark interest rates declined) and a sales mix that included a higher share of its pricier AI-oriented computer vision chips. Ambarella's sales of CV3 chips are rising as automakers re-accelerate their autonomous driving efforts, and it's selling a broader range of AI-oriented CV5 chips to the automotive, robotic camera, and consumer markets. It has also significantly reduced its exposure to the Chinese security camera market.
During Ambarella's latest conference call in November, CEO Fermi Wang said the chipmaker "achieved record levels of AI revenue" which "contributed to a higher blended average selling price." Wang also predicted its automotive and IoT markets would continue to grow over the next two years "despite the weakness in the overall market."
For its fiscal 2026, analysts expect Ambarella's revenue and adjusted earnings to rise by 16% and 44%, respectively, as those tailwinds persist. Ambarella, with an enterprise value of $3.1 billion, trades at 10 times next year's projected sales and a forward price-to-earnings ratio of 75. Those valuations might seem a bit rich, but they could be justified by the growing need for computer vision chips across the booming AI market.
Could Ambarella be worth more than Wolfspeed in a year?
I believe Wolfspeed should trade at lower valuations as its core business faces severe macroeconomic and regulatory challenges. Analysts expect Wolfspeed's revenue to rise 46% in its fiscal 2026 as the macroeconomic environment warms up again, but its recent troubles could lead them to rein in those rosy forecasts over the next year. Even if the company hits that bullish target, its stock could still drop by about 7% if it gets revalued to 5 times sales. That would reduce its enterprise value to about $5.8 billion.
Meanwhile, Ambarella could maintain its higher valuation as it recovers from its cyclical downturn. With an enterprise value of $3.2 billion, it's less valuable than Wolfspeed, but it could be worth $3.8 billion by the end of fiscal 2026 if it keeps matching analysts' expectations and maintains its current valuations. But if the bulls get more excited and conclude they are willing to pay 20 times forward sales, its enterprise value could surge to $7.7 billion. We should also remember that Wolfspeed's enterprise value includes its $3.1 billion in long-term debt. Ambarella doesn't have any long-term debt.
Therefore, Ambarella might overtake Wolfspeed as its core markets recover and it keeps expanding its AI-oriented business. I'm not absolutely sure that will happen -- since it's tough to predict their fluctuating valuations -- but Ambarella could generate much bigger gains than the out-of-favor silicon carbide chipmaker over the next 12 months.
