Ambarella: An AI Play In The Making

Key Points

• Ambarella's transition to an edge/AI company is well underway. 
• Barring near-term headwinds, the opportunity in AI could see the company grow by a double-digit CAGR for the next 8 years. 
• A pullback in price action may trigger a new wave of buying but wait for the signal. 

Ambarella NASDAQ: AMBA has had its share of ups and downs, but it has always come out of its slumps in a better position than before. Today’s issues are inventory-related, with the Q4 results and 2023 outlook at less-than-expected levels. The takeaway from the report is that inventory levels among end-users are high, but demand and use by those OEMs is also high.

This should lead to a reset later in the year, allowing Ambarella to return to growth.

Between now and then, the company will continue its transition from a computer-vision/AI company to an AI-vision/edge computing company which is what the story is. Ambarella’s 3rd-generation edge AI chips will soon be available on a production-level basis, and the 1st of its 5nm system-on-a-chips is in production now.

These chips will help OEMs extract valuable data from their visually oriented input devices that can be used in applications across the industrial and societal landscape. These applications range from security to inventory management and autonomous driving. 

To put this opportunity into perspective, the AI industry was valued at $136.5 billion in 2022 and is expected to grow at a compound annual growth rate of 37% for the next 8 years or more. This growth will be led by companies like Nvidia NASDAQ: NVDA and Advanced Micro Devices NASDAQ: AMD, but niche players like Ambarella stand to make significant gains. Among the opportunities is the chance to diversify into software and services, where the bulk of the growth will come from. 

Ambarella Falls On Weak Results, Outlook 

Ambarella issued a mixed report but not all data within it is bad. In fact, despite the slowdown in Q4 business the company produced growth for the year, increased its cash balance, reduced its liabilities and reduced inventory which is good news indeed. This will help put it in a position to regain lost ground once the inventory situation is corrected among end-users.

Until then, the Q4 revenue came in at $83.32 million, down 7.7% YOY, and missed the consensus estimate if by a very slim margin. The margin is where the details are best; the margin contracted under the pressure of rising costs and increased R&D that was offset to some degree by a reduction in SG&A. This left the adjusted earnings at $0.23, down YOY but $0.08 better than expected.

“Our customers indicate end market demand is healthy, but we are experiencing a more pronounced slowdown as they reduce inventory. Our Q1 revenue is expected to be well below end market consumption. We currently do not expect these existing cyclical factors to cause future quarter revenue to decline below our Q1 guidance,”  said Fermi Wang, President and CEO.

Guidance Weighs On Shares; A Reversal Is In Play

The guidance is what is weighing on the market now. The company is guiding revenue and earnings well below the consensus forecast, which has shares moving lower. While bad news for current holders, this is setting up a buying opportunity for new money and there are some interesting signals in the price action. 

The price action in Ambarella is in the process of tracing out a Head & Shoulders Reversal. It is still early in the pattern so it could fail, but a clear shoulder and head is already formed so this pullback could form the final shoulder. If so, this stock could enter consolidation at the current levels if it does not make a complete reversal. The complete reversal depends on the business improving later in the year and/or outperforming the current guidance.