Ambarella (NASDAQ: AMBA), the chipmaker that makes image-processing systems on a chip (SoCs) for action cameras, dash cams, security cams, drones, and other devices, is a divisive stock eliciting strong bullish and bearish attitudes among market watchers.
The bulls claim the chipmaker has a best-in-breed position in the image-processing market and that its expansion into computer vision chips will tap into the growth of the driverless car market. The bears note that its exposure to China is worrisome, that it's losing customers to rival chipmakers like Intel (NASDAQ: INTC), and that its stock is overvalued.
Image source: Getty Images.
What the bulls believe
Ambarella's recent first-quarter report initially appeared to support the bull thesis. The company's revenue fell 17% annually to $47.2 million, beating estimates by $0.2 million. Its adjusted net income plunged 93% to $0.3 million, or $0.01 per share, but still cleared expectations by $0.07. Ambarella's forecast for a decline in revenue of 15% to 18% year over year for the second quarter also indicated that its declines were finally starting to slow.
|Metric||Q1 2019||Q2 2019||Q3 2019||Q4 2019||Q1 2020|
|Revenue||$56.9 million||$62.5 million||$57.3 million||$51.1 million||$47.2 million|
Data source: Ambarella quarterly reports. YOY = Year over year.
Ambarella also authorized a new $50 million buyback program, which will last through June 2020. That's equivalent to nearly 5% of Ambarella's current enterprise value.
Ambarella also started the mass production of its second computer vision SoC, CV25, during the first quarter, and it expects to start shipments in the second quarter. It also predicts a warm reception for its new high-end H6LM camera SoC -- a low-power chipset that bundles together 4K encoding, multi-screen streaming capabilities, and cybersecurity features for security-camera makers. Ambarella expects its revenue growth to improve in the second half of the year as demand for automotive and security SoCs improves.
What the bears believe
But the bears still had plenty of reasons to tear down the stock. Ambarella's adjusted gross margin fell 220 basis points annually to 59.6%, and management expects that contraction to continue into the second quarter with an adjusted gross margin of 57% to 59%. That has been a troubling trend over the past year:
|Metric||Q1 2019||Q2 2019||Q3 2019||Q4 2019||Q1 2020||Metric||Q1 2019||Q2 2019||Q3 2019||Q4 2019||Q1 2020|
|Revenue||$56.9 million||$62.5 million||$57.3 million||$51.1 million||$47.2 million||Gross margin||61.8%||61.4%||60.9%||60.6%||59.6%|
Non-GAAP basis. Source: Ambarella quarterly reports.
Ambarella attributed those declines to a higher percentage of sales of lower-margin chips, especially in the Chinese surveillance-camera market. Moreover, the Trump administration could soon add Chinese surveillance-camera makers Hikvision and Dahua -- two of Ambarella's biggest customers in China -- to its trade blacklist of companies.
Ambarella also expects the John S. McCain National Defense Authorization Act for Fiscal Year 2019, which bars Hikvision and Dahua from selling their cameras to government agencies, to throttle its orders from both customers. Ambarella doesn't disclose how much revenue it generates per customer, but Morgan Stanley analyst Joseph Moore recently warned that Ambarella's revenue exposure to Hikvision was in the "high teens" percentage.
Ambarella is still highly dependent on its Chinese customers -- which include automotive suppliers Baolong and Shanghai OFilm, as well as automakers Geely, Chery, SAIC Motor, Dongfeng, Changan, and BAIC. Ambarella doesn't disclose how much revenue it generates from China, but its revenue from Taiwanese original design manufacturers -- which serve a large portion of its Chinese orders -- accounted for 58% of sales last year.
Image source: Getty Images.
Intel also poses a massive threat to Ambarella. Its Movidius computer vision chips already won orders from Ambarella's top customers, including DJI Innovations and Hikvision, and its Mobileye computer vision chips have a big head start against Ambarella's CV chips in the driverless market.
Lastly, Ambarella trades at nearly 80 times earnings estimates -- which is a rich valuation for a company with negative revenue and earnings growth. That's probably why Ambarella's insiders sold more than 100,000 shares over the past 12 months but didn't buy a single share.
Fortune still favors the bears
Ambarella is still the preferred image-processing SoC maker for many companies, but it can't overcome its two major headwinds -- the trade war and competition from Intel -- anytime soon. Its revenue is declining, its margins are contracting, and the stock is overvalued. That toxic mix indicates that the bears are probably right about Ambarella's future.
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