Ambarella (AMBA) is set to report third quarter fiscal 2020 earnings results after the closing bell Monday. While its shares — up 9.74% year to date — have underperformed the market over the past three and five years, Ambarella has begun given investors reasons to expect better future performances.
Founded in 2004, Ambarella has grown to prominence by designing chips that are low-powered and able to deliver high-definition and ultra HD video compression. The company’s video capture technology was a key component in GoPro (GPRO) cameras — once its largest customer. GoPro’s struggles, however, have adversely impacted Ambarella’s growth. The company's business transition away from the action camera market and into the security and automotive markets has begun to pay off.
This pivot, which began five years ago, has allowed Ambarella to scale into high-growth areas such as producing computer vision chips that enable various AI tasks such as security cameras features for facial recognition and autonomous driving for connected cars. It’s a market that included larger rivals such as Nvidia (NVDA) and Intel (INTC). Investors want to know when these initiatives will produce upside revenue and profit growth for Ambarella.
The company forecasted Q3 revenue to decline about 20%, while gross margin is expected to slip from the Q2 to 60% to 62%. It’s likely for this reason the stock has underperformed the S&P 500 over the past six months and on a year-to-date basis. Is the market overreacting and ignoring Ambarella’s business improvements? A top- and bottom-line beat on Monday and upside guidance will certainly answer this question.
For the quarter that ended October, Wall Street expects the Santa Clara, Calif.-based company to earn 5 cents per share on revenue of $54.07 million. This compares to the year-ago quarter when earnings came to 11 cents per share on revenue of $67.92 million. For the full year, ending January, earnings are projected to be 16 cents, down from 69 cents a year ago, while revenue of $212 million would decline 7.3% year over year.
Despite competitive pressures from Intel and Nvidia, Ambarella's strategy to scale into the professional camera security business showed signs of paying off, producing double-digit revenue growth in the second half of 2020 and the first quarter of 2021. But the company was not immune to the disruptive effects of the pandemic which impacted its revenue, particularly to the auto and security markets.
Second quarter revenue declined 11% year over year to $50.1 million, but enough to surpass consensus estimates. Owing to gross margin of 62.4%, above the 59.6% consensus, Q2 adjusted EPS came to 6 cents, which beat by a whopping 8 cents. But the stock was punished due to downbeat revenue and gross margin guidance. It’s likely the management, which has touted the company’s AI efforts, was being overly conservative.
On the conference call with analysts, Ambarella's CEO Fermi Wang was pretty clear about the company’s strategy, saying Ambarella was "embedding AI in all of our new products.” Based on these words, it doesn’t seem as if Ambarella is shying away from the competition. Nevertheless, while the shares appear attractive at current levels, the company on Monday must further tout its AI efforts and offer an optimistic outlook that suggest long-term growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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