Ambarella: Back To Reality

Dec. 03, 2019 7:34 PM ETAmbarella, Inc. (AMBA)INTC12 Comments8 Likes


  • Ambarella beat FQ3 results, but the management team suggested revenues of $10 million were pulled forward.
  • After years of spending, the company still can't disclose any needle moving CV chip deals with automotive customers.
  • The stock is likely to retest $40 with revenue estimates for FY20 and FY21 declining.

Despite all of the promises of computer vision chips and the huge stock rally this year, Ambarella (NASDAQ:AMBA) still hasn't generated anywhere near the results and forward expectations warranting the stock rally this year. Investors should expect the stock to come back down to earth based on my previous research due to falling expectations for the next couple of years consistent with the past of this chip company and risks of basically operating in China.

Solid Quarter, But...

The market was initially excited by FQ3'20 results where the chip company beat analyst estimates by a wide margin of $0.11 and easily beat revenue estimates after 18.5% growth over last FQ3. The big issue here is that FQ3'18 revenues were up at $89 million and FQ3'17 results topped $100 million in revenues.

For this computer chip company to have such a bright future in the automotive sector, Ambarella needs to guide to something far bigger than 12% revenue growth in the current quarter. The company only expects a meager revenue goal of $55 to $59 million in the January quarter followed by another sequential dip in the April quarter with one big caveat.

On the earnings call, CFO Casey Eichler has Chinese customers pulling forward $10 million worth of revenue this year:

We estimate Dahua and Hikvision combined by the end of fiscal '20 pulled in approximately $10 million of revenue from fiscal '21. As a reminder, we typically experienced a sequential decline in the first quarter ending in April and a rebound in our second fiscal quarter.

The company didn't specify the amounts on a quarterly basis, but clearly, Chinese customers like Hikvision pulled forward revenues due to the tariff issues. The limited positives from the last few quarters are immediately wiped out by this revelation.

The stock rally from $40 earlier this year to over $65 is quickly disappearing. Ambarella has now lost the uptrend from this year and a break below previous strong resistance at $50 appears next.

Weak Future

The biggest issue with Ambarella is that the bright future never happens. On the earnings call, the CEO gave investors a whole list of reasons to avoid a stock trading at a premium multiple of 7x FY21 sales estimates of $239 million:

Factors potentially disruptive to our business include changes to tariffs and all the entity lists, market share shifts between our customers, supply chain issues, potential export regulations on advanced technologies and the potential for customers in China to take actions to reduce their dependency on U.S. components.

The actual warning to long-time investors was the company suddenly bringing up the robotics SDK. Ambarella has a history of hyping up new product opportunities going back to the original action cameras to drones to security cameras to computer vision and now to robotics. In the process, revenues haven't grown for years.

Some investors will incorrectly see this as an opportunity. The reality is that Ambarella had every reason to focus the FQ3'20 call on the CV chips and the big opportunity in the automotive sector, yet CEO Fermi Wang started shifting to another market common with past shifts. The company never lives in the present market opportunities.

For this reason and along with the $10 million pull forward, analysts are lowering FY20 and FY21 revenue estimates. Estimates that were above $250 million last year are now down below $240 million in a period where Ambarella ought to be able to overcome such a limited amount of pull forward revenues.

ChartData by YCharts

Intel's (INTC) Mobileye division has a revenue run rate of $1 billion, again questioning why Ambarella is having such a difficult time boosting total revenues from annual levels below $250 million. Even worse, Ambarella should start boasting about major contracts for a market with a forecasted TAM for advanced driver-assistance systems (ADAS) and data at an estimated $72.5 billion by 2030.


The key investor takeaway is that no real justification exists for the rally in the stock this year. Despite strong promises for the CV chips, the majority of the revenue upside this year appears from the revenues pulled forward. The current analyst forecasts for FQ1'21 show meager growth and quarterly revenues dipping below $50 million.

Ambarella does have $400 million of cash in the bank, so the opportunity still exists for something big to occur, but the current management team and the team focused on China probably exclude the company from signing major deals outside of Asia. My view is the stock dips back below $40.

This article was written by

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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