Image source: Ambarella.

Video and imaging chipmaker Ambarella (AMBA 3.06%) has seen its stock plummet over the past year, but a big valuation slide highlights what could be an attractive buying opportunity. The stock has lost roughly 20% of its value year-to-date and currently trades at a more-than-60% discount from its 52-week high. 

A weaker-than-anticipated sales outlook for the current fiscal year, disappointing sales from GoPro (GPRO -1.40%) -- Ambarella's biggest customer -- and downgrades from leading investment firms have been the major pressures on the stock price, but Ambarella also has a number of factors working in its favor. Is it time to buy Ambarella stock?

Putting Ambarella's valuation collapse in context
Ambarella is a small-cap tech company with a market cap of roughly $1.4 billion and a history of share price volatility -- characteristics that can lead to significant stock declines amid worsening conditions in the broader market. The S&P 500 index has dipped roughly 8% over the past year, and lower-than-expected sales for wearable cameras in recent quarters and the emergence of competitors in growth markets have put a damper on Ambarella's outlook.

For the company's fiscal year, management issued revenue and profit targets that came in below the average analyst predictions, and thus far, the company's targeting for reduced growth for its wearable camera chips has been reasonably accurate.

GoPro's recently released second-quarter report provides some context to Ambarella's recent stock woes. GoPro's sales came in roughly 12% lower than the average analyst estimate and were down roughly 31% from the prior-year quarter. The soggy performance for GoPro primarily traces to its HERO4 Session camera -- a small, cube-shaped device that packs the basic features of the HERO4 line into a more compact form factor. Ambarella designs the key video processing chips in GoPro devices, and poor sales for what was supposed to be GoPro's flagship 2015 product significantly dampened performance and expectations for the chipmaker   

The mainline HERO4 cameras, first released in 2014, were a big hit for GoPro, while the HERO4 Session ostensibly represented a way for the camera maker to diversify its product lineup as it took more time than usual to ready its next mainline device -- the HERO5, expected to release sometime this year. But the Session's high price point and lack of new features (other than its form factor) seem to have dissuaded potential customers, and the GoPro brand was not strong enough to propel the device to strong sales.

GoPro is Ambarella's biggest customer, and accounts for roughly a third of the company's sales, so it's not surprising that under-performance for the Session has had a significant impact on the chipmaker's wearable cameras segment. But have the big sell-offs created an opportunity?

The case for Ambarella stock
While GoPro's business is very important to Ambarella, the chipmaker has a diverse range of customers and product segments, as well as technological performance advantages, that give the company and its stock long-term potential. With steep share-price declines over the past year, Ambarella now looks like a potential value play, and more bad news for GoPro could potentially make for an even more attractive jump-in point for potential Ambarella investors.

At roughly 15, the company's forward P/E ratio is near its lowest point since early 2013, and the company's price-to-earnings-growth (PEG) ratio further bolsters the value case for Ambarella as a value investment. A PEG ratio below 1 typically indicates that a stock is undervalued, and Ambarella's forward and trailing-12-month PEG values sit at roughly 0.18 and and 0.14, respectively, These valuation metrics suggest that Ambarella stock may be very cheap at current prices -- a premise that could also be supported by the fact that the company's stock has actually rebounded following GoPro's disappointing quarterly results.

Is it time to buy Ambarella? 
Despite shakiness over the past year, Ambarella has growth avenues in commercial and consumer IP security camera segments, and it's just starting to tap into the latter with its chips for smart-home devices from companies including Comcast and Alphabet, as well as opportunities in drone and automobile sensors. The wearables picture might also be better than it seems, as Ambarella also provides chips for companies including Garmin and Xiaomi, and the company should benefit from GoPro having a stronger product lineup this year.  

New competitive pressures are bound to emerge, but the strength of Ambarella's technologies, substantial opportunities in growth segments, and an attractive valuation make Ambarella worth looking into as a long-term investment.