Ambarella’s Traction Drives Stock Surge: Market Reversal Underway

Key Points

• Ambarella gained traction in Q3, leading to improved guidance, which is likely cautious. 
• Analysts are raising their stock price targets, leading to a multi-year high. 
• The company is well-positioned to benefit from a multi-year upcycle in industrial chips focused on edge computing, AI, and the IoT. 

It has taken time for Ambarella NASDAQ: AMBA to gain traction, but its Q3 results prove it is. The shift from a pure-play computer vision company to an edge AI company focused on computer vision is instrumental to the company's traction and provides a vehicle for growth long into the future. The Q3 results are company-specific due to its leadership position in computer vision/AI technology but also supported by a general upcycle budding in the industrial chip market. Results from Analog Devices NASDAQ: ADI, Supermicro Computer NASDAQ: SMCI, GlobalFoundries, and others reveal that global inventory correction is ending, and demand is improving across all end markets, including automotive and IoT, where Amberalla shines. 

Ambarella Advances 20% After Beat-and-Raise Report: Higher Prices to Come

Ambarella shares shot up 20% after it released the Q3 results because growth accelerated sequentially to over 63% year-over-year, outpaced the consensus estimate by nearly 500 basis points, and led to an increase in guidance that is likely cautious. The company reported $82.65 million in net revenue driven by strength in the automotive and IoT end market, demand for AI edge inference products, and next-gen technology like the CV5 series. The company noted new product ramps among end-market OEMs as a driver of CV5 demand, which is also noteworthy because of the margin. Edge AI product sales accounted for 70% of the revenue and are viewed as a multi-year growth driver by management. 

The margin news is excellent. The company’s revenue growth provided sufficient leverage to reduce the GAAP loss by half and produce a solid beat on the bottom line. The adjusted earnings came in at $0.11, reversing a loss in the prior year, to outpace MarketBeat’s reported consensus by $0.07 or 17,500 basis points. The guidance is equally strong. The company is guiding Q4 revenue to $76 to $80 million compared to the consensus of $69 million, and the forecast is likely cautious. Ambarella’s chips are used in cameras that can pick up people and objects in highly congested areas, have voice and motion-activated controls, and have AI-assisted image enhancements suitable to numerous consumer and industrial applications. 

Investors are also happy about the cash flow and balance sheet. The company produced a positive cash flow quarter, will sustain its annual positive cash flow trend, and is guiding for additional improvement next year. Balance sheet highlights include increased cash and assets offset by liabilities, steady equity, and ultra-low leverage, so there is an opportunity for significant value gains over the next year as the cash balance builds. One opportunity is for resumed stock buybacks to offset share-based compensation, and another is for value-building acquisitions to bolster the edge AI portfolio. Regarding leverage, total liability is about 0.2x equity, leaving the company ample financial flexibility. 

Analysts Cheer for Ambarella’s Results and Raise Price Targets Significantly

The analysts' response to Ambarella’s results is bullish, with the nearly one dozen revisions tracked by MarketBeat raising their price target by double-digits. The new range puts the stock between $90 and $100, or a 12.5% to 25% upside compared to the post-release price pop. A move to that level would put this market at a nearly two-year high and set it up to complete a reversal. In that scenario, the stock price could advance another 20% to trade near the $100 level and move higher over the long term. The long-term consensus is for this company to quadruple in size by the decade's end, and the forecasts are cautious. 

The technical outlook is good. The stock has a hurdle at $85 but should be able to move past it now. The analysts have begun to lift their targets again, and the institutions have bought AMBA in 2024. Institutional activity is bullish for three quarters in 2024, including Q4. With this in play, the stock price can move above $100 without the help of analysts.