Ambarella (AMBA) is set to report third quarter fiscal 2019 earnings results after the closing bell Tuesday.
Founded in 2004, Ambarella has grown to prominence by designing chips that are low-powered and able to deliver high-definition and ultra HD video compression. The company’s video capture technology is a key component in GoPro (GPRO) cameras, its largest customer, which accounts for roughly 24% of fiscal 2017 revenues. Unfortunately, GoPro’s struggles, which have been well documented, have adversely impacted Ambarella’s growth.
Accordingly, since GoPro’s execution struggles emerged, Ambarella’s valuation has fallen commensurately, down some 60% since 2015. While growth expectations have also come down, analysts, on Tuesday, will want to see the extent to which Ambarella can better diversify its revenue stream and continue to decouple itself from GoPro.
In particular, the company can assuage investor fears by touting other areas of the business such as its security camera applications and home monitoring cameras — once believed to be strong growth catalysts.
For the quarter that ended April, Wall Street expects the Santa Clara, Calif.-based company to deliver 9 cents per share on revenue of $56.14 million. This compares to the year-ago quarter when earnings came to 39 cents per share on revenue of $64.14 million. For the full year, ending January, earnings are projected to be $1.41, down from $2.06 a year ago, while revenue of $296.03 million would rise 0.20% year over year.
Ambarella shares have been punished over the past three months, falling almost 17%. Part of the reason was due to downbeat commentary by the management during the Q4 conference call referring weak revenue for the just-ended quarter due to weak demand from the drone market. The company noted that major drone manufacturers have begun to build low-priced drones in an effort to boost sales.
Combined with the ongoing decline of GoPro, Ambarella faces some tough quarters ahead. The good news is, there are signs that Ambarella has begun to rely less on GoPro, which only accounted for 12.8% of Ambaraella’s revenues in the first quarter (versus 24% in 2017). What’s more, the company has told investors that it expects revenue from GoPro to continue to fall through the rest of the current fiscal year. And Wall Street has begun to take notice.
Last month, Cowen Analyst Matthew Ramsay initiated coverage on Ambarella at an Outperform with a $65 price target, suggesting a 31% upside to Monday’s close of $49.56. Citing new hardware release and the company’s detailed computer vision plan, Ramsay noted that investors are likely underestimating the company’s long-term strategy. With next year’s earnings projected to grow at 40% and revenue at 20%, while AMBA stock is down almost 16% year to date, Ramsay raises a strong argument.
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