Wall Street wasn't thrilled with the latest earnings update from Ambarella's (AMBA -2.09%) management team. The stock dropped after the computer vision tech specialist reported lower first-quarter sales and earnings as a cyclical downturn continued to impact the semiconductor industry.
Yet selling conditions are sure to improve as supply and demand levels balance. In the meantime, Ambarella is busy developing its latest generation of AI-enabled computer vision tech to support fast-growing industries like autonomous driving. With that positive potential in mind, let's look at whether investors should try to take advantage of the stock's recent slump and buy shares today.
The latest trends
Ambarella's Q1 update showed no impending end to the poor selling conditions that have hurt sales in recent quarters. Inventory is too high across several semiconductor niches, and weaker demand is keeping many of its customers cautious on spending. Sales through late April fell 31%, a much worse result than the prior quarter's 8% drop.
The good news is that Q1 revenue met management's cautious outlook from late February. Customers are still working at reducing inventory right now, even as demand remains solid for many semiconductor applications. "The cyclical headwinds persist," CEO Fermi Wang said in a press release, "and continue to pressure our financial results ."
Profits and outlook
Those pressures made a big impact on the bottom line. Ambarella's gross profit margin declined to 60% of sales from 63% a year ago. Selling expenses fell, but the company continued spending aggressively on research and development. These trends resulted in expanding operating losses, which landed at $36 million compared to $11 million last year.
AMBA Operating Margin (TTM) data by YCharts
Management says it is seeing strong initial interest in applications of its third-generation computer vision platform, including from customers in the Internet of Things (IoT) and automotive niches. But progress here will be offset by continued industry pressures, leading to a nearly 20% sales decline in the fiscal second quarter.
Buy the stock?
The company is following the right strategy of continuing to invest in its innovation lead in preparation for the next cyclical upturn. Declining inventory levels should set the stage for faster growth ahead, too.
But investors might want to watch this story from the sidelines for now. Ambarella hasn't demonstrated a clear path toward sustainable profitability yet, and its focus on computer vision tech makes it a riskier investment than more diversified semiconductor giants. The timing of any rebound might be pushed further out, too, especially if a recession develops over the next few quarters in key markets like the U.S.
Given those risks, the stock still seems expensive trading at its current price-to-sales multiple of about 9. Sure, the company has potential as its tech incorporates AI innovations through the next few generations of its computer vision platform.
But investors should favor companies with stable or growing sales, and positive earnings, in the current market environment. Keep Ambarella on your watch list for now, but hold off on making it a big part of your portfolio.
