Ambarella: robust double-digit upside comes into focus

Ambarella NASDAQ: AMBA has struggled with weak demand and an inventory glut for over a year but should soon come out of its slump. Indications from the Q3 results suggest that growth will resume in the next fiscal year and will accelerate over the next few years. Additionally, the forecasts for long-term growth are increasing and supported by the rapid advancement of edge computing. 

Ambarella is well-positioned as a CV specialist because computer vision is crucial to AI and the edge. CV for autonomous vehicles and IoT devices can’t function properly via the cloud because of latency; Ambarella combines CV with AI inference, bringing AI models to the edge for rapid decision-making, and their products resonate with clients. 

Ambarella points to normalizing markets and growth 

Ambarella didn’t have a great quarter, but it was better than feared and came with numerous Easter eggs for investors to pick up. The revenue of $50.6 million is down 39.1% compared to last year on inventory normalization and weakness in the IoT end market. Still, it is 1100 basis points better than expected on gains made in camera, security and automotive. 

Margin news was equally promising, with adjusted gross and operating margins down compared to last year but well above the Marketbeat.com consensus estimates. The $0.28 quarterly loss is 30% less than expected, offset by improved FCF. The company’s FCF rose 11% YOY, and further improvement is expected in the coming quarters. 

The guidance for Q4 and outlook for Q1 2024 is favorable. The company expected revenue to grow sequentially with a range of $50 to $53 million and for the margin to hold steady in the range of 62% to 63%. Sequential growth is expected to continue in Q1, and YOY growth will resume by Q3 at the latest. Next year’s growth will be supported by new product launches and client wins, including accelerating sales of the CV5 SoCs. 

Regarding the long-term growth outlook, the company reiterated its targets for revenue growth and upped its funnel outlook in the automotive segment. The automotive segment is expected to generate about $2.4 billion over the next six years, up 4% from the last update. This is significant growth from this year’s estimated $80 million, an estimated 20% CAGR that aligns with the CV/edge computing outlook. 

Ambarella is well-positioned for 2024

Ambarella struggles with inventory normalization but is well-positioned to come out of the reset and build on its foundation. The company’s FCF improvement helped it to maintain a fortress balance sheet that is well-capitalized and has little debt. The company’s cash position is up sequentially and YOY to $222.3 million, sufficient to sustain business operations at current profit levels for many quarters. Given the outlook for revenue growth and leverage, the company should begin to turn a profit in the calendar year 2025. 

Catalysts on the horizon for Ambarella

Analysts have yet to issue updates or revisions based on Ambarella’s Q3 results, but there are catalysts ahead that could get them to act. Until then, the analysts have rated this stock a Moderate Buy and view it as undervalued. 

The low end of the analysts' range is $58 and consistent with the bottom of AMBA’s existing trading range. The consensus target of $80.95 is down slightly over the last few weeks but has been relatively steady since last quarter and is nearly 40% above the current action. In this scenario, stabilization may be enough to keep the stock moving higher now and set it up for larger gains in 2024. 

The technical outlook is tepid to warm. The stock price action shows support at the bottom of a trading range and is indicated higher. The action isn’t robust but steady and may take the market toward the high-end range near $90. The top of the range will provide significant resistance and likely cap gains until additional catalysts emerge. Those might not come out until the next reporting cycle.