How Ambarella Is Looking Past GoPro

Electronic circuit board.

Sometimes you have to take a little short-term pain to achieve a long-term gain. That's been the story this year for Ambarella Inc. (NASDAQ: AMBA) and its most recent quarterly results. The company is suffering from GoPro Inc. withdrawal symptoms as its largest customer reportedly is replacing Ambarella's systems on chips (SOCs) with its own ASICs (application specific integrated circuits) for future product releases, taking an expected $60 million bite out of Ambarella's revenue this year.

While investors turn their attention to the company's future and its new chip technology, the table below shows management's plan to make up the GoPro revenue shortfall and turn in flat revenue for the year. GoPro wrapped up its fiscal year 2017 at the end of January and reported Q1 2018 results in early June.

Data source: Ambarella and author estimates of GoPro revenue based on Ambarella comments. YOY = year over year.

Ambarella's computer vision technology

A key announcement from Ambarella's conference call with analysts was that the company's first Computer Vision 1 (CV1) system on a chip works and is on schedule to go to customers in the second half of the year. This is great news for Ambarella, as there is no guarantee when a semiconductor chip design goes through wafer processing that what comes out the other end as a packaged device is going to pass all tests and function as designed.

Here are CEO Fermi Wang's comments regarding the initial CV1 SOC from his prepared remarks during the company's conference call:

Later in the call, he said: "In summary, in addition to continuing growth opportunities in our existing market, we see the combination of video with computer vision technology [as a primary driver] of new opportunities in both current and emerging markets, including OEM automotive and robotics. Our investment in the development of [a] new family of computer vision SoCs to enable our customers' next generation of advanced video cameras will be the foundation for the future expansion of our business."

Management says that the architecture of its new chip has been designed to optimize the performance of the software stack that is integral to the computer vision product that Ambarella is about to introduce. The end goal is comply with the U.S. Department of Transportation's highest standards for autonomous vehicles.

The software stack was originally developed at a company Ambarella acquired in 2015 called VisLab . VisLab's claim to fame was a demonstration of its autonomous driving solution that enabled a vehicle to drive itself from the company's home in Italy to China.

Although Ambarella did not quantify its technical specifications, management did say that the product family will eventually have a one-chip design providing better performance than current two-chip solutions, which are more costly due to the additional circuitry to support the second chip.

Here is how CFO George Laplante summed up the CV1 SOC: "Our architecture, I think, will give you much more performance and the ability to expand the functionality in the device."

What's next?

Investors are going to need to be patient with Ambarella as it bolsters other sources of revenue. If you believe robotics and autonomous vehicles are going to be a large market opportunity, Ambarella should offer investors a front-row seat into two developing industries.

The industrial robotics market is expected to approach $80 billion in size by 2022 and the semi-autonomous vehicle market is expected to approach 8 million vehicles by 2021. Keep in mind that Ambarella already has existing automobile manufacturers such Nissan, Toyota Motor Corporation , and Mercedes as customers. All three are involved with autonomous vehicles.

Worrying about the loss of GoPro and its effect on this year's numbers is putting too much emphasis on the past. Better to set this year aside and look to the future.

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Frank DiPietro owns shares of Ambarella. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy .

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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