Slow recovery on cards as Ambarella (AMBA) navigates macro challenges

After reporting a surprise profit for the first quarter that was hit hard by the COVID outbreak, Ambarella, Inc. (NASDAQ: AMBA) remains optimistic about its future prospects and looks to emerge stronger from the crisis supported by its solid pipeline, though certain product categories witness a dip in demand.

The Santa Clara, California-headquartered provider of semiconductor-based video-processing solutions issued not-so-impressive guidance for the second quarter – reflecting the muted CV design activity in the early weeks – which apparently didn’t go well with investors. It is estimated that work disruptions have prompted some customers to defer purchase decisions and cancel projects.

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Also, demand remains under pressure due to geopolitical headwinds like the ban on exports to original design manufacturers and equipment manufacturers in China, which is a key market for the company. According to the management, one area that is on a clear growth trajectory is security, which primarily comprises video surveillance. With thermal security cameras becoming more affordable, there is an uptick in demand from the consumer side.

Mixed Outlook

Ambarella’s long-term growth prospects will depend on how the company taps opportunities in the automation space, leveraging its AI-assisted solutions like the computer vision processing architecture and solutions for the auto industry. However, the extended sales cycles that demand large amounts of resources for sustainable revenue generation might delay the recovery process in the post-COVID era.

It needs to be seen how the ongoing disruptions would affect cash flow and the Capex plan, which is crucial for semiconductor firms that invest significantly in research and development. For Ambarella, it is important to continue with its expansion plans, with focus on exploring new markets for the fast-growing segments like robotics and automotive, at a time when margins are dragged by declining average selling prices, especially for image processing and video solutions.

Growth Strategy

At the same time, a functional supply chain is a prerequisite for the company to maintain the momentum, due to the fabless business model that involves third-party foundries for manufacturing. Over the years, Ambarella has strived to stand out in the highly competitive semiconductor solutions business by constantly upgrading to more advanced and cost-effective processors with smaller geometry.

“I think our supply chain has seen a very little impact from the COVID-19. However, we do see a very strange ordering pattern for our customer, and when we talked to them, they do mention disruptions in their supply chains, particularly in the auto space. Also, we see some disruption in the supply chain for our security customer also.”

Kevin Eichler, the chief financial officer of Ambarella

Ambarella is not a dividend-paying entity and the management doesn’t seem to have any intention to pay dividends in the near future, which is something that makes the stock less attractive. That, combined with the usual risks associated with the recession-like market environment, calls for caution as far as investing is concerned. It is widely expected that the company’s market value would remain broadly flat during the remainder of the year.

Unlike service-oriented tech firms, the remote work model might not be feasible for Ambarella, meaning that if the pandemic-related shutdown is extended for a long period it would affect the main areas of the business, including design win, product development, and productivity.

“Our strategy to leverage our successful video processing heritage into the development of a highly optimized video AI computer vision platform has not changed. And as the industry emerges from the current crisis, demand for higher levels of automation should be more important than ever, driving the large new markets we have identified in the past,” said Fermi Wang, chief executive officer of Ambarella, during an interaction with analysts.

Q1 Revenue Up

Earnings improved to $0.04 per share in the April-quarter from breakeven in the corresponding period of last year, defying expectations for a modest loss. The bottom-line benefitted from a 16% growth in revenues to $54.6 million. Typically, demand remains low in the first quarter due to seasonal factors, and the trend reverses in the third fiscal quarter.

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Soon after the earnings announcement, Ambarella’s stock retreated from the recent high and traded slightly above the $60-mark this week. It had slipped to a one-year low in mid-March after investor sentiment took a beating from the COVID-related slump. The shares, which have gained 58% since the beginning of the year, are currently trading broadly at the levels seen at the beginning of the year.