Ambarella, a chip designer that specializes in self-driving car technology and artificial intelligence (AI), is a small-cap stock that often flies under the radar. However, with the self-driving car market showing signs of reaching a significant turning point, Ambarella is worth keeping an eye on in the second half of 2023.
Over the past five years, Ambarella has experienced its fair share of ups and downs but has managed to double its value during that time. Historically known for supplying high-end video chips to GoPro, the company has since pivoted away from consumer electronics and shifted its focus towards new growth markets.
Ambarella’s video chip designs are now utilized in automotive camera systems, video security cameras, and industrial applications such as robotics. The company’s small and power-efficient AI chips target any device at the network edge, which interacts with the real world.
Furthermore, Ambarella is currently on its third-generation computer-vision AI chip for autonomous cars, known as CV3. This technology can also be employed in security cameras featuring auto-recognition capabilities and robots used in manufacturing automation.
However, Ambarella has faced challenges in the form of a chip industry slump that began in the second half of 2022. The company’s revenue in the last quarter dropped by 31% year over year, and free cash flow has also been on the decline. These difficulties have hindered Ambarella’s path to achieving a more robustly profitable scale.
Nonetheless, there is hope on the horizon. Management anticipates that revenue in the next quarter will be around $64 million, indicating a flattening of recent performance, and profit margins are expected to improve slightly. The growing adoption of advanced driver assist systems (ADAS) and advancements in autonomous driving technology suggest that Ambarella may return to double-digit revenue growth by 2024, according to Wall Street analysts’ consensus.
While Ambarella may currently appear somewhat troubled, it is worth noting that the company has successfully fended off numerous large competitors over the years. With each advancement in chip design, Ambarella enhances the ability of computing systems to see and facilitates steady progress toward full driving autonomy.
Why should investors pay attention to Ambarella stock now? With the chip industry’s business expected to pick up speed in the latter half of 2023, Ambarella could quickly return to strong growth and re-start its profit generation. The normalization of elevated chip inventories and the fact that Ambarella has managed to protect its balance sheet throughout the downturn further support this notion. The company has $227 million in cash and short-term investments, with zero debt as of April 2023.
Moreover, revenue linked to edge AI applications, which includes a commercial self-driving car customer, now constitutes 60% of Ambarella’s total revenue. In comparison, AI accounted for only about 45% of the company’s sales last year, according to management’s estimates.
To be clear, I am not suggesting buying Ambarella stock right now. However, the company’s efforts to refocus its operations on longer-term secular growth trends, such as vehicle autonomy and edge device AI, may be starting to pay off. It is therefore advisable to keep a close watch on Ambarella throughout the rest of this year.
