Ambarella (AMBA 2.60%) stock has been in red-hot form on the market since the second half of 2024, but its healthy rally came to an abrupt halt following the release of its fiscal 2025 fourth-quarter results (for the three months ended Jan. 31) on Feb. 26.
Ambarella stock crashed a massive 17% on the day following its earnings release. However, this sharp pullback in this fast-growing company's stock price is an opportunity for savvy investors to buy a solid artificial intelligence (AI) stock at an attractive valuation.
NASDAQ: AMBA
Key Data Points
Let's look at the reasons why buying Ambarella looks like a no-brainer right now.
Ambarella's steep drop doesn't seem justified
Ambarella's fiscal Q4 revenue shot up an impressive 63% year over year to $84 million, well ahead of the consensus expectation of $78 million. Meanwhile, the company's bottom line improved remarkably, as it posted a non-GAAP (generally accepted accounting principles) profit of $0.11 per share, as compared to a loss of $0.24 per share in the year-ago quarter.
What's worth noting is that Ambarella's growth has accelerated in recent quarters, thanks to the fast-growing demand for edge AI applications. The company is known for manufacturing computer vision processors that are deployed in edge devices such as security cameras, drones, Internet of Things (IoT) devices, vehicles, and wearable devices.
Ambarella has been offering AI capabilities in its computer vision processors that allow its chips to capture images and video and then interpret information from them with the help of AI and machine learning (ML) models. Demand for edge AI devices is anticipated to increase at a nice clip in the future.
According to one estimate, the edge AI market is expected to grow by 2.3x over the next five years, driven by the growing adoption of this technology in the markets that Ambarella serves. The good part is that Ambarella has started capitalizing on this opportunity, which is evident from the terrific growth in the company's top and bottom lines.
Management points out that 70% of its top line came from sales of edge AI processors in fiscal 2025. The company also added that its edge AI processors have a higher average selling price (ASP), which explains the remarkable turnaround in its bottom line.
Ambarella management expects edge AI processors to continue driving an improvement in the ASP. Even better, Ambarella points out that "the introduction of smaller and more optimized models" following the breakthrough achieved by DeepSeek will be a tailwind for AI processing at the edge.
All this indicates that Ambarella's impressive growth could be here to stay for the long run. Its guidance also suggests that another strong year could be in the cards for this chipmaker. Ambarella is expecting fiscal Q1 revenue to land at $84 million at the midpoint of its guidance range, which would be a big jump of 54% from the year-ago period.
Not surprisingly, analysts have increased their revenue growth expectations from Ambarella for the next three fiscal years.
AMBA Revenue Estimates for Current Fiscal Year data by YCharts
Why the stock is a no-brainer buy right now
Ambarella's recent drop has brought the stock's price-to-sales ratio down to 9 from almost 12 at the end of last year. Buying the stock at this valuation looks like a smart thing to do, as it isn't all that expensive when compared to the U.S. technology sector's sales multiple of 7.7.
We have seen that Ambarella has been clocking stunning revenue growth in recent quarters and seems built for better times in the long run thanks to the fast-growing edge AI market. The robust growth in the company's revenue is also expected to translate into a sharp improvement in its bottom line as well.
AMBA EPS Estimates for Current Fiscal Year data by YCharts
And finally, Ambarella's 12-month price target of $95, as per 15 analysts covering the stock, points toward a 55% jump from current levels. The pace at which the company is growing indicates that it could indeed hit that mark before heading higher in the long run, giving investors yet another reason to buy this semiconductor stock while it remains beaten down.
