3 Challenges Marring Ambarella's (AMBA) Future Prospects

The week ended Sep 1, 2017, remained encouraging for the stock market as investors were seen shrugging off news like heightening tension between the United States and North Korea, as well as the dismal job data for August. Despite this, Ambarella Inc.AMBA was among the worst performers as the company has been facing challenges which are expected to hinder its growth opportunities in the near term.

Ambarella manufactures video compression and image processing technology that is used in a variety of small cameras, computers and mobile phones. The company has a diversified product line, offering devices which fit into five main markets - Security Cameras, Automotive Cameras, Sports & Flying Cameras, Wearable Cameras, and Broadcast Infrastructure Systems.

Shares of this chip maker plunged more than 20% last week. In fact, the stock has been among the worst performer in the industry to which it belongs to in the year-to-date period. During the said period, Ambarella has lost 22% of its value, while the industry has gained 27.3%.

What's Behind the Latest Downtrend?

The downtrend is mainly due to the company's recently provided disappointing outlook for the third quarter and fiscal 2018. The company projects a decline in the third-quarter fiscal 2018 revenues, the first after five consecutive quarters of year-over-year growth. Apart from this, it also lowered its revenue outlook for the full fiscal.

During the fiscal second-quarter conference call held last Thursday, the company noted that a "substantial decline in GoPro revenues and a moderate decline in the drone market" would adversely affect its next quarter's top-line performance. However, Ambarella anticipates strong year-over-year revenue growth in IP security (both professional and consumer), as well as solid growth in automotive and non-sports wearable.

Challenges Hindering Growth Opportunities

The company faces three main challenges which may hinder its growth prospects.

Firstly, Ambarella, most noted for its sports camera technology, is set to lose its largest customer - GoPro GPRO . The company produces a video processing chip, which is a main component in the popular brand of GoPro action cameras. GoPro produces water resistant, wearable, high-definition cameras which produce unique first-person videos and have been taking the Internet by storm for the last few years.

However, Ambarella, during its fiscal first-quarter results, warned about a possible decline in revenues from GoPro in fiscal 2018. It reaffirmed the same concretely during the fiscal second-quarter conference call as well. This is because, per the company, GoPro is using a chip from a competitor in its new camera, which will hurt Ambarella's shipment volumes, resulting in revenue decline in the second half of the fiscal.

Secondly, prevailing weakness in the drone market has been denting this chip maker's revenues. The company witnessed two back-to-back quarters of decline in this market. Moreover, Ambarella projects the softness in the drone market to persist throughout fiscal 2018.

Thirdly, the company is facing a new challenge in the form of Qualcomm Incorporated QCOM . It should be noted that Qualcomm is also looking to expand its product portfolio in order to cope with its declining share in the mobile chipset market. It is set to acquire NXP Semiconductors NXPI , which is the world's biggest automotive chipmaker. This acquisition is likely to help Qualcomm in expanding its foothold in new markets such as wearables, automotive, drones and other Internet of Things devices. The entry of Qualcomm is a real threat as Ambarella may find it difficult to win new deals and might, as well, lose some of its customers.

Currently, Ambarella carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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