Ambarella: Successful Transition To High-Growth Industries

Summary

• Ambarella is successfully diversifying into high-growth markets like AI and computer vision.
• The company's investments into AI is allowing greater access to emerging growth markets.
• Ambarella reported solid Q4 earnings in the face of growing competition from the likes of Intel.

Chipmaker Ambarella (NASDAQ:AMBA) is at the forefront of the AI (artificial intelligence) and CV (computer vision) industries. Ambarella's transition away from pure video processing could send the company to new heights moving forward. The rapid advancements in AI are allowing Ambarella to access a plethora of promising industries like robotics and automotive. Ambarella's solid Q4 is evidence that the company's diversification efforts are paying off.

The company reported a quarterly revenue of $57.2 million, representing a 12% Y/Y increase. While Ambarella fiscal year revenue pretty much remained stagnant, the company is currently transitioning towards higher potential markets. The company also reported a strong GAAP quarterly gross margin of 58.2%. Ambarella is wisely doubling down on artificial intelligence as this technology starts to take off.

Emphasis on Artificial Intelligence

AI has become an increasingly integral part of emerging technologies. Ambarella is clearly aware of this trend and has decided to focus far more heavily on this emerging field. Unsurprisingly, the company is making a concerted effort to move away from a purely video processing business to the much larger AI and CV business.

Ambarella has spent years developing an AI processor architecture designed for endpoint applications. In fact, Ambarella has spent more than $350 million on video-based AI in order to access growing markets like robotics. The company's CV SoC (system-on-a-chip) combines the company's AI processor and video processor. These innovative chips are aimed at making Ambarella a more versatile company.

Ambarella's Computer Vision SoC integrates industry-leading video processing and AI.

Source: Ambarella

Ambarella is leveraging its technology to diversify into new emerging sectors like robotics. In fact, the company focused much of his attention at CES 2020 on its robotics software development kit, which is a unified software infrastructure aimed at promising markets like consumer robotics, industrial robotics, and automated guided vehicles. With large corporations like Amazon (AMZN), Alibaba (BABA), and iRobot (IRBT) all heavily investing into robotics, Ambarella has a large pool of potential customers.

Security cameras and automotive still account for a large percentage of Ambarella's revenue. However, Ambarella is starting to successfully diversify its businesses. Ambarella's increasingly sophisticated AI is allowing the company to access more markets than ever before. Despite Ambarella's recent success, the company faces growing competition.

Headwinds

Despite Ambarella's solid quarter, the company is facing greater competition than ever. Ambarella is relatively small compared to other tech giants in the space. Intel (INTC) is one of Ambarella's largest competitors in the burgeoning CV industry. Intel, which is currently valued at $212 million, is perhaps Ambarella's greatest long-term threat given the company's experience and vast resources.

Intel bought advanced driver-assistance systems and self-driving company Mobileye for a stunning $15.3 billion in order to break into the autonomous vehicle industry. The company also acquired CV chipmaker Movidius in order to cement itself is a powerhouse in the CV industry. Intel has even taken some of Ambarella's customers in recent years.

Intel is clearly planning to make a huge splash in the growing CV industry and will pose a huge threat to Ambarella. Below is an image of Mobileye's self-driving car.

Source: Mobileye

With autonomous technologies only growing more popular, Ambarella will face more competition than ever. So far, Ambarella appears to be maintaining a strong foothold in important markets like automotives. Furthermore, Ambarella's recent success in newer markets indicate that the company still has a competitive advantage over much of the industry.

Perhaps a more immediate threat facing Ambarella is the coronavirus. The coronavirus is already has starting to have a financial impact on Ambarella. The company expects to face an elevated LIBOR moving forward largely as a result of this virus. Every day operations will also be impacted as Ambarella is taking steps to mitigate the impact of the coronavirus. It is still uncertain how the coronavirus will ultimately play out, putting a greater deal of uncertainty on Ambarella.

Ambarella's large footprint in Asia could be a problem given the coronavirus outbreak.

Source: Ambarella

Conclusion

Ambarella is at the forefront of highly promising AI, video processing, and computer vision industries. However, it is still questionable whether or not the company will have the resources to deal with growing threats from technology giants like Intel. So far, Ambarella has done a good job of maintaining a strong market presence.

Ambarella currently has a market capitalization of $1.7 billion and a forward P/E ratio of 121. Investors clearly see a large growth path ahead for the company. While this view is understandable given the promise of video processing, AI, and CV, these industries are set to become far more crowded. Investors would be wise to stay cautiously optimistic on Ambarella at the company's current valuation.

Analyst’s 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.

Comments

[Ol' Blue Eyes]

One thing to keep in mind is that Ambarella, although it is headquartered in Silicon Valley and management (Fermi and CTO Kohn) is based in the US, about 80% of employees including most engineers are located in China. The chip fabricator that manufactures its chips is also in China.

This could discourage acquisition of the company, which otherwise would be a plausible target. AMBA might also be effected by the ever-changing relationship between the US and China. The squabbling over tariffs could affect the company, but I’m no expert as to the details of how.

[Ol' Blue Eyes]

The author may be a little ahead of things with respect to Ambarella's progress in Computer Vision. Only ten percent of revenue is supposed to come from CV this year. But I've been following AMBA for a long time and I am a great sceptic but I was genuinely impressed with the last CC and the Morgan Stanley presentation. I'm convinced that Ambarella is making real progress in generating interest in its CV architecture, but the "design cycle" is slow for the Advanced Driver Assistance Systems (ADAS) levels 4 and 5. At these levels the driver is increasingly not involved in driving the automobile, although still present to take over the controls if necessary.

Ambarella is doing well with its security camera CV. One customer on the consumer side of smart surveillance cameras is Ring, whom a lot of you may know was taken over by Amazon which had been successfully selling the Ring cameras (doorbell camera a popular example) for a number of years before. But the moderate income from these sales, as well as ADAS 2 and 3 applications will have to get them by for probably another solid two years before ADAS 4 and 5 revenue hopefully kicks in. (Robotics also has exciting prospects, but serious revenue from robotics is likely four or five years away according to Fermi.)

Even though the revenue may be far off, documented design wins should start to be announced this year for ADAS 4 and 5. Wins with the right customers would be enough to send the price soaring.

Investors and possible investors should read this quarter's conference call transcript (here on SA) and really the transcript from the last quarter. In addition, the day after earnings release Fermi gave a presentation to Morgan Stanley that turned into an intense 40 minute discussion of everything. If you can't last for it all, listen to the second half when design win possibilities are discussed that even include the hope that AMBA can take some business away from Intel/MobilEye based on its two main advantages of MobilEye: programmability to give to the CV family more flexibility, and lower power consumption. Engineers always want the lowest possible power consumption. (I haven't heard the programmability edge talked about lately. Perhaps MobilEye has caught up. I don't know.)

So nothing is assured with respect to ADAS, but if it were assured than AMBA would already have taken off for the moon. At the current depressed price it might be a good buy, or at least a good "average in." The fact that the markets and AMBA have taken such a steep fall is no proof that, after a seeming comeback is underway, both cannot turn and fall another twenty percent.

Here is the link to the 40 minute conversation between respected Morgan Stanley analyst Joe Moore and CEO Fermi. Press the PLAY button to get it going. AMBA is Morgan Stanley's (through Moore) top tech small cap for the year. Or something close to that.

event.webcasts.com/...

[mgd20]

Are you back investesed?

[Ol' Blue Eyes]

I think at under 40 I would have been in, but in the process of selling the family home and I just don't have much cash until the closing. It costs a lot of money to get the house ready for sale and it costs a lot of money just living here alone and paying the property taxes, fuel oil bill and insurance.

[micro]

Worst Seeking Alpha article I've read in some time! "The company expects to face an elevated LIBOR moving forward largely as a result of this virus." "In fact, the company focused much of his attention ..." "Intel, which is currently valued at $212 million ..."

[Prescott Bill]

I'm glad to be introduced to this company.

[keko5647]

Strong perpectives with the 5G development.

[George Gelfer]

Zero debt, fabless semiconductor operation, mostly engineers, appear to have moved from commodity consumer product applications (sports cameras) to higher value added commercial apps. Super smart CEO too.