Key Points
Ambarella had a better-than-expected quarter, with revenue and earnings surpassing estimates.
Guidance for Q4 is positive, and year-over-year growth is anticipated for the next fiscal year.
Ambarella is a leader in computer vision and artificial intelligence at the edge of computing.
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Ambarella (NASDAQ: AMBA) has faced challenges due to weak demand and an inventory surplus for over a year but is expected to recover soon. Signals from the Q3 results indicate that growth will resume in the next fiscal year and accelerate over the next few years. Additionally, the forecasts for long-term growth are increasing and supported by the rapid advancement of edge computing.
Ambarella is well-positioned as a computer vision specialist because computer vision is crucial to artificial intelligence and the edge. Computer vision for autonomous vehicles and IoT devices cannot function properly via the cloud due to latency; Ambarella combines computer vision with artificial intelligence inference, bringing artificial intelligence models to the edge for rapid decision-making, and their products are well-received by clients.
Ambarella indicates towards normalizing markets and growth
Ambarella had a decent quarter, performing better than expected. The revenue of $50.6 million is down 39.1% compared to last year, primarily due to inventory normalization and weakness in the IoT end market. However, it surpassed expectations by 1100 basis points, driven by gains made in the camera, security, and automotive sectors.
The margin news was equally promising, with adjusted gross and operating margins lower than last year but well above the Marketbeat.com consensus estimates. The $0.28 quarterly loss is 30% less than expected, offset by improved free cash flow. The company’s free cash flow rose 11% year over year, and further improvement is anticipated in the coming quarters.
The guidance for Q4 and outlook for Q1 2024 is favorable. The company expects revenue to grow sequentially within a range of $50 to $53 million and for the margin to remain steady in the range of 62% to 63%. Sequential growth is expected to continue in Q1, and year-over-year growth will resume by Q3 at the latest. Next year’s growth will be supported by new product launches and client wins, including accelerating sales of the CV5 SoCs.
Regarding the long-term growth outlook, the company reiterated its targets for revenue growth and increased its funnel outlook in the automotive segment. The automotive segment is expected to generate about $2.4 billion over the next six years, up 4% from the last update. This represents significant growth from this year’s estimated $80 million, an estimated 20% annual growth rate that aligns with the computer vision/edge computing outlook.
Ambarella is well-positioned for 2024
Ambarella is grappling with inventory normalization but is well-positioned to emerge from the reset and build on its foundation. The company’s free cash flow improvement helped it to maintain a strong balance sheet that is well-capitalized and has little debt. The company’s cash position has increased sequentially and year over year to $222.3 million, enough to sustain business operations at current profit levels for many quarters. Given the outlook for revenue growth and leverage, the company should start turning a profit in the calendar year 2025.
Catalysts on the horizon for Ambarella
Analysts have yet to issue updates or revisions based on Ambarella’s Q3 results, but there are upcoming catalysts that could prompt them to take action. Until then, the analysts have rated this stock a Moderate Buy and consider it undervalued.
The lower end of the analysts’ range is $58 and consistent with the bottom of AMBA’s existing trading range. The consensus target of $80.95 is slightly down over the last few weeks but has been relatively steady since last quarter and is nearly 40% above the current price. In this scenario, stabilization may be enough to keep the stock moving higher now and set it up for larger gains in 2024.
The technical outlook is lukewarm to positive. The stock price action shows support at the bottom of a trading range and is trending higher. The action isn’t strong but steady and may take the market toward the higher end of the range near $90. The upper end of the range will provide significant resistance and likely cap gains until additional catalysts emerge. Those might not materialize until the next reporting cycle.
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