SoundHound AI has been one of the best-performing stocks on the market in the past year, registering stunning gains of 936% as of this writing, thanks to a combination of factors.
SoundHound took off big time in February last year after it emerged that artificial intelligence (AI) giant Nvidia has a small stake in the company. However, investors shouldn't forget that SoundHound has been clocking impressive growth quarter after quarter and has been gaining favor on Wall Street as well, contributing to the stock's rapid rise in the past year.
But then, buying SoundHoundstock right now doesn't seem like a very smart move to make, considering that the voice AI solutions provider has a price-to-sales ratio of 94. However, there may be a cheaper alternative for investors who are looking for a small company that's making the most of the proliferation of AI and can become the next SoundHound: Ambarella (AMBA 2.53%).
We will take a closer look at Ambarella's business and check how AI is turning out to be a solid growth driver for this little-known chipmaker.
AI has given Ambarella a nice shot in the arm
Ambarella designs chips that enable image and video processing in cameras that are primarily deployed in the automotive industry, along with Internet of Things (IoT) applications such as security cameras, drones, and wearable cameras, among others. The company points out that the growing adoption of AI-enabled use cases within vehicle cameras, as well as IoT applications, is boosting the demand for its system-on-chips (SoCs) that are capable of tackling AI workloads at the edge.
Edge AI refers to the processing of data on devices locally without the need to upload or download that data to an AI server. The advantage of edge AI is that it enables real-time decision-making since the computing is done locally on a device, thereby reducing latency and enhancing security and privacy. The demand for edge AI is expected to jump significantly in the long run, since it can be deployed in multiple applications ranging from medical imaging to smart home appliances to traffic management to drones to robotics.
This probably explains why Fortune Business Insights expects the global edge AI market to generate close to $270 billion in annual revenue in 2032 from $20 billion in 2023. Ambarella has set its sights on this market by developing AI computer vision chips that can be deployed in edge devices. The good part is that its AI-specific products are now driving tangible gains for the company.
For its fiscal 2025's third-quarter (ended Oct. 31), Ambarella reported a terrific year-over-year increase of 63% in revenue to $82.7 million. CEO Fermi Wang pointed out on the company's earnings conference call that Ambarella "achieved record levels of AI revenue, which in turn contributed to a higher blended average selling price ("ASP")."
The AI-driven contribution led to a massive acceleration in Ambarella's growth during the quarter, considering that the company's revenue for the first nine months of the fiscal year has increased at a much slower pace of 15% to $201 million. Even better, Ambarella reported non-GAAP (generally accepted accounting principles) earnings of $0.11 per share for fiscal third quarter, as compared to a loss of $0.28 per share in the year-ago period.
So, the stronger ASP of the company's AI chips seems to be positively impacting the company's bottom-line performance. More importantly, Ambarella's guidance indicates that it is set to sustain its impressive growth in the current quarter. The company expects fiscal Q4 revenue to land at $78 million at the midpoint of its guidance range. That would be a 51% increase from the same quarter last year.
The chipmaker's guidance suggests that it will end fiscal 2025 with a top line of $279 million (calculated by adding the revenue in the first nine months of the year to the fiscal Q4 guidance). That points toward a 23% increase in its top line from fiscal 2024 levels. Looking ahead, analysts are expecting Ambarella to deliver robust double-digit growth over the next couple of years as well.
However, don't be surprised if the company delivers stronger growth than analysts' expectations.
AMBA Revenue Estimates for Current Fiscal Year data by YCharts
An expanding revenue pipeline points toward a bright future
Ambarella is expecting AI to increase its addressable market nicely over the next three years. The company estimates that its serviceable addressable market at the end of 2024 stood at just over $5 billion. By 2027, that number is expected to jump to around $8 billion.
What's more, Ambarella points out that its automotive revenue funnel for the next six years stands at approximately $2.2 billion. That includes $800 million worth of business that the company has already won from customers, with another $1.3 billion in the pipeline. Assuming it converts all of its pipeline into actual revenue, its annual automotive revenue run rate could be around $360 million for the next five years.
That would be a big improvement over the fiscal 2024 automotive revenue of $77 million. Meanwhile, the additional opportunity in AI-enabled IoT devices could allow Ambarella to achieve stronger levels of revenue in the future. So, there is a possibility that Ambarella could continue to grow at a faster pace than Wall Street's expectations in the long run.
That's why now may be a good time to buy Ambarella stock, even though it has clocked 33% gains in the past six months. The stock is trading at 12 times sales right now, making it significantly cheaper than SoundHound. What's worth noting here is that SoundHound's revenue was up 89% year over year in the third quarter of 2024.
Ambarella's performance last quarter suggests that it has the ability to clock outstanding growth that could be rewarded with more gains on the market in the future, especially because of its solid pipeline and expanding addressable market.
