Is Ambarella Stock a Buy Now?

Ambarella's (AMBA -2.09%) stock price plunged 20% on Aug. 30 after the image-processing chipmaker posted its latest earnings report. In the second quarter of fiscal 2024, which ended on July 31, its revenue fell 23% year over year to $62.1 million and missed analysts' expectations by $0.2 million. It posted an adjusted net loss of $6 million, compared to an adjusted net profit of $7.6 million a year ago, but its adjusted loss of $0.15 per share still cleared the consensus forecast by $0.03 per share.

Ambarella's numbers were disappointing, but does its post-earnings plunge represent a buying opportunity for long-term investors? Let's dig deeper to find out.

Image source: Getty Images.

Ambarella faces fierce macro and competitive headwinds

Ambarella produces image-processing systems on chips (SoCs) and computer vision chips for Internet of Things (IoT) devices and connected vehicles. These chips enable cameras to process higher-quality photos and videos at higher speeds.

In fiscal 2023 (which ended on Jan. 31), Ambarella made 75% of its revenue from IoT chips and the remaining 25% from automotive chips. It also generated 82% of its revenue in Asia during the year, and China still accounts for a large portion of the region's sales -- even after several of its top Chinese customers (including the security camera makers Hikvision and Dahua) were blacklisted by U.S. regulators.

Its revenue fell 3% in fiscal 2021 as the pandemic spread, but surged 49% in fiscal 2022 after those disruptions ended. But in fiscal 2023, its revenue only grew 2% as macro headwinds curbed its sales of IoT and automotive chips again. Competition from other computer-vision chipmakers like Mobileye, Intel's Movidius, and Qualcomm could be exacerbating that slowdown and limiting Ambarella's pricing power.

How long will Ambarella's slowdown last?

Ambarella's adjusted gross margin has held steady over the past year, but its revenue has declined year over year for four consecutive quarters.

Data source: Ambarella. YOY = year over year.

For the third quarter, it expects its revenue to plunge another 38% year over year with an adjusted gross margin of 62%-64%. For the full year, analysts expect its revenue to drop 31% and for its adjusted earnings to stay negative.

During the conference call, CEO Fermi Wang blamed that slowdown on customers "aggressively reducing their inventory" as "pockets of weak end-market demand" (especially China) complicate those efforts. Wang said Ambarella was "not expecting a recovery in calendar 2023," but it anticipates a normalization of inventory levels by the end of the year and a "return to growth in calendar 2024."

Ambarella also upgraded and expanded its own CVflow AI (artificial intelligence) vision architecture for its SoCs over the past few years. Wang noted its latest CV3 SoCs are well equipped to handle "more challenging AI inference workloads such as partial or complete mobile system autonomy" and support the development of generative AI chatbots that are linked to IoT devices and connected vehicles. Those AI chips might make Ambarella an underappreciated play on the booming AI market, but bigger chipmakers like Mobileye and Qualcomm are also producing similar SoCs.

Nevertheless, analysts expect Ambarella's revenue to rise 17% in fiscal 2025 as it narrows its adjusted net loss. But with an enterprise value of $2.25 billion, Ambarella still isn't a bargain at 10 times this year's sales and 8 times next year's sales.

Is it the right time to buy Ambarella?

Ambarella might be a compelling takeover target for one of its larger rivals, but its stock could stay in a holding pattern for at least a few more quarters until its cyclical downturn finally ends. Its red ink could make it even less appealing as long as interest rates stay elevated. As a result, I believe investors should stick with larger, better diversified, and more profitable chipmakers in this challenging market instead of betting on Ambarella's eventual recovery.