Ambarella: Wait For The Next Dip
- Ambarella reported a solid FQ3'21 quarter with revenues growing 64%.
- The company increased the estimated 6-year automotive revenue funnel to $1.8 billion.
- Investors should wait for the next 20% dip with the stock trading at 20x FY23 revenues and only forecast to grow at a 20% clip.
- This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
Ambarella (NASDAQ:AMBA) shareholders have seen the stock surge in the last few months as the company has signed up several automotive chip deals. The stock was attractive on the last dip into the $80s, but Wall Street has again gotten too excited about the future of their computer vision chips. My investment thesis is again Bearish on the stock near $200 until the next major dip.
The Right Price
A big key to any stock is buying at the right price at the right time. Ultimately, price matters to returns. My previous research was Bearish on the stock above $106, but my key takeaway was for investors to look for a decent sell-off to buy shares.
From the early March article to the end of August, Ambarella regularly traded below $100 and even dipped into the low $80s a couple of months after the research report identified the need to buy the stock cheaper. An investor wanting to own the stock for the long term computer vision chip future could've gotten a 20% discount just by waiting a few months for a better entry point.
An investor buying at $106 has still made over 90% returns in this period, but one waiting for say a dip to $86 has now generated a return in excess of 130%. All while, the investor reduced the risk of owning the stock into a 20% dip and facing the real possibility of a panic sell of Ambarella for a loss at the lows.
Strong Future, But...
Ambarella has a strong future in the automotive safety market with customers continuously looking to add safety features on the path to full autonomous vehicles reaching the market in 2024 or 2025. Though, the company does have a history of shifting from one hot sector to the next without building on the success.
On the FQ3'22 earnings call, the chip company impressed the market with surging long term demand for CV chips. CEO Fermi Wang provided a very positive backlog metric for the automotive segment:
Our automotive revenue funnel is expanding. A year ago, we announced a six-year, discounted, automotive revenue funnel of about $600 million, and using the same methodology, this figure has approximately tripled.
The automotive revenue funnel has now grown in the last year from $600 million to $1.8 billion. The six-year revenue figure amounts to $300 million annually ramping each year.
For the last quarter, revenues were $92 million with ~25% of revenues from the automotive sector. Ambarella has an annual automotive run rate just in the $100 million range highlighting how the business will ramp over the period. Importantly though, investors need to understand the company is currently operating at a $360 million run rate requiring the actual sales to exceed these levels to generate any growth.
The CEO went on to discuss the current chip deal with EV maker Rivian Automotive (RIVN). The EV company is using a large camera and chip solution from Ambarella to provide hands-free driving assistance for current truck production:
During the quarter, we were excited to see that Rivian, the American electric vehicle maker, started customer deliveries of its R1T truck. The R1T’s Driver+ features 11 cameras, 5 radars and 12 ultrasonic sensors to deliver true hands-free driving assistance along with a full set of safety features. The R1T’s Driver+ system utilizes multiple CV2AQ CVflow automotive SoCs for its AI vision processing. Additionally, the R1T also uses Ambarella’s CV22AQ CVflow automotive SoC for its surround view camera processing and gear guard security system.
These high level deals with a well-known EV manufacturer that just went public with a market cap in excess of $100 billion contributed to Ambarella doubling in months. Now the question is whether investors should chase the stock here.
Remember that Ambarella has a revenue base in the $360 million range after the FQ3 results and FQ4 guidance for revenues of ~$90 million. In addition, the company has historically struggled to hang on to previous revenue streams when transitioning to the next big product opportunity.
Current analyst revenue estimates only forecast 20% annual revenue growth rates. The six-year funnel pushes a large portion of the revenues into 2027. Analysts forecast FY27 revenues reach $920 million, or ~$560 million above current revenue levels. Nearly $1 billion worth of additional annual revenues are included in the combined FY26/FY27 revenues which doesn't even factor in 2027 numbers.
Source: SA earnings estimates
In essence, the current analyst estimates appear to include a lot of the current pipeline assumptions into estimates that contribute to only 20% annual growth. The upside potential does come from Ambarella building the funnel beyond the $1.8 billion level, but most revenue added to any funnel by now would be for revenues beyond the next 2 to 3 years.
The key investor takeaway is that the stock already has a market cap of ~$7.9 billion with the stock at $200. Ambarella actually trades at nearly 20x the FY23 revenue targets of $398 million. While the business is booming, the stock is likely again to see another 20% dip to where investors would find a much better opportunity to acquire the stock.
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This article was written by
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