Ambarella (NASDAQ:AMBA) just delivered an exceptional quarter thanks to strength in its emerging-market segments. But when the video-processing chip specialist once again issued disappointing guidance, it became evident the market wasn't sure what to think.

Shares of Ambarella opened down nearly 6% Friday morning, but quickly recouped those losses to trade up as much as 5.7% by 10:00 a.m. -- then ultimately closed down a modest 1.7% for the day:

AMBA Price Chart

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Why all the indecision? One reason is because it "helps" that Ambarella stock went into the report down around 55% from its 52-week-high, which was set this past June. The negative effects of any miscues this quarter were arguably already priced in.

A strong showing
Let's tackle the headline numbers, anyway. For Ambarella's fiscal third-quarter 2016, revenue climbed 41.9% year over year, to $93.2 million -- slightly above the high-end of the $90 million to $93 million guidance range with which Ambarella disappointed investors three months ago. This time, however, analysts had ratcheted down expectations ahead of the report, with consensus estimates calling for revenue slightly below the bottom-end of Ambarella's outlook. For that, we can partly blame an exceptionally difficult quarter and weak guidance issued in late October by key Ambarella customer GoPro (NASDAQ:GPRO).

On a relative basis, Ambarella's bottom line was much more impressive. Adjusted gross margin expanded to 65.9%, up from 63.4% in the same year-ago period, helped by stronger-than-expected growth in the higher-margin drone-camera business. That translated to a 65.6% increase in adjusted net income, to $36.6 million, or $1.08 per share. Here again, analysts were only looking for adjusted earnings of $0.86 per share.

Overshadowed by the future... for now
To Wall Street's credit, this GoPro-centric caution wasn't entirely off base. Ambarella CEO Fermi Wang explained:

Our strong third-quarter results reflect our success in expanding revenues in new markets such as flying cameras and home security monitoring, as well as existing markets for professional IP security cameras and automotive after-market dash cameras. Although we expect these markets to continue their strong annual growth, we are experiencing near term headwinds in the wearable sports market which is expected to negatively impact revenue in Q4 of this year.

On one hand, when the market hears "wearable sports market," it effectively replaces the phrase with "GoPro." But on the other hand, investors should be pleased that Ambarella was able to more than offset these headwinds in fiscal Q3 with strength in its younger emerging markets. That would have been well and good if the situation wasn't about to get worse -- if only temporarily.

For the current quarter, Ambarella expects revenue between $65 million and $67.5 million, and adjusted net income between $15 million and $17 million. Based on Ambarella's expected diluted share count of 34 million in fiscal Q4, that amounts to adjusted earnings per share of $0.44 to $0.50. By contrast, analysts were more optimistic on both fronts, with consensus estimates calling for fiscal Q4 revenue of $76.7 million, and adjusted earnings of $0.59 per share.

Looking even further ahead, during the subsequent conference call, Ambarella CFO George Laplante elaborated that high inventory levels for customers in the wearable sports camera market are expected to have a "substantial impact on our shipments in Q4, extending into Q1 of fiscal year 2017."

Consequentially, Laplante also stated that this should mean total revenue in the first quarter of fiscal 2017 will decline slightly on a year-over-year basis. After that, however, all markets -- including the wearable sports camera segment -- should demonstrate growth from their same year-ago periods.

When all is said and done, Ambarella now expects revenue in fiscal 2017 to climb between 15% and 20%. That's below Ambarella's target model for long-term growth of 20% to 25% -- though Wall Street was only expecting Ambarella to achieve roughly 20% top-line growth next fiscal year, anyway. 

The bigger picture
In short, investors were left mulling what to think of a better-than-expected fiscal Q3, followed by promises of a weaker-than-expected current quarter and fiscal Q1 of next year, and finally, a light at the end of the tunnel if Ambarella can manage to get back on track with sustained growth in all markets going forward. And of course, there's always the chance Ambarella is once again under promising with the intention of over delivering. 

All things considered, I'm not the least bit surprised our fickle market is torn over Ambarella's prospects. But I also think it's not hard to argue that investors are overthinking the near-term repercussions for Ambarella of the struggling wearable sports camera market.

Eventually, that market will resume growing, even as Ambarella's other budding verticals increase their respective contributions to the overall business. When it does, Ambarella will emerge even stronger for it, and I think that long-term investors who are willing to take advantage of Ambarella's recent pullback will be handsomely rewarded for their patience.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.