Key Points
Ambarella had a better-than-anticipated quarter, with revenue and earnings surpassing estimates.
Guidance for Q4 is positive, and year-over-year growth is anticipated for the next fiscal year.
Ambarella is a leader in computer vision and artificial intelligence at the edge of computing.
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Ambarella NASDAQ: AMBA has faced challenges due to weak demand and an inventory surplus for over a year, but it is expected to emerge from its slump soon. The Q3 results indicate that growth will resume in the next fiscal year and accelerate over the next few years. Additionally, the long-term growth forecasts are increasing and supported by the rapid advancement of edge computing.
Ambarella is well-positioned as a computer vision specialist because computer vision is vital to AI and the edge. Computer vision for autonomous vehicles and IoT devices cannot function properly via the cloud due to latency; Ambarella combines computer vision with AI inference, bringing AI models to the edge for rapid decision-making, and their products are resonating with clients.
Ambarella indicates a return to normalization in markets and growth
Ambarella had a decent quarter, surpassing expectations, with numerous positive aspects for investors. The revenue of $50.6 million is a 39.1% decrease compared to last year due to inventory normalization and weakness in the IoT end market. However, it exceeded expectations by 1100 basis points, driven by gains in camera, security, and automotive sectors.
The 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 free cash flow. The company’s free cash flow increased by 11% year-over-year, and further improvement is expected in the coming quarters.
The guidance for Q4 and outlook for Q1 2024 is favorable. The company anticipates sequential revenue growth in the range of $50 to $53 million, with margins expected to remain steady in the range of 62% to 63%. Sequential growth is expected to continue in Q1, with year-over-year growth resuming 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.
In terms of the long-term growth outlook, the company reiterated its targets for revenue growth and raised 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 represents significant growth from this year’s estimated $80 million, with an estimated 20% compound annual growth rate that aligns with the computer vision/edge computing outlook.
Ambarella is well-positioned for 2024
Ambarella is dealing with inventory normalization but is well-positioned to emerge from the reset and build on its foundation. The company’s improvement in free cash flow helped it to maintain a strong balance sheet with ample capital and minimal debt. The company’s cash position has increased sequentially and year-over-year to $222.3 million, sufficient to sustain business operations at current profit levels for many quarters. Given the revenue growth outlook and leverage, the company is expected to begin turning a profit in the calendar year 2025.
Catalysts on the horizon for Ambarella
Analysts have not yet issued updates or revisions based on Ambarella’s Q3 results, but there are upcoming catalysts that could prompt them to take action. Currently, the analysts have given this stock a Moderate Buy rating and consider it undervalued.
The lower end of the analysts’ range is $58, consistent with the bottom of AMBA’s existing trading range. The consensus target of $80.95 has remained relatively steady since last quarter and is nearly 40% above the current price. In this scenario, stabilization may be sufficient to drive the stock higher and set it up for larger gains in 2024.
The technical outlook is moderately positive. The stock price shows support at the bottom of a trading range and is trending higher. The trend is steady and may lead the market towards the high-end range near $90. However, significant resistance at the top of the range is likely to limit gains until additional catalysts emerge, which may not occur until the next reporting cycle.
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