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Ambarella Diversifies to Counter Lower Revenues from GoPro


On Jan 5, we issued an updated research report on Ambarella, Inc. AMBA.

Notably, Ambarella, a producer of video compression and image processing semiconductors is facing decline in revenues from one of its major customer, GoPro GPRO. However, we remain encouraged by the company’s foray into other markets, such as IP security, automotive, non-GoPro wearable and drones/flying cameras.

The company posted better-than-expected results for third-quarter fiscal 2018, keeping its earnings streak alive for the 10th time in a row. However, the company registered year-over-year declines in its top- and bottom lines, primarily due to a notable plunge in chip sales to GoPro, softness in the drone market and increased operating expenses.

Nevertheless, Ambarella stock has gained 27.1% year to date, substantially outperforming the 12.4% rally of the industry it belongs to.

Influencing Factors

Ambarella is pretty well-known for its cost and power efficient high performance video processing SoCs. These highly configurable chips are suitable for wearable camera, IP camera, automotive dashboard cameras and drone camera makers.

Additionally, in an effort to diversify its exposure and decrease its dependency on GoPro, Ambarella entered the VR camera space with the launch of H3 SoC in January last year. The company claims that the chip will work well in high-end drones and VR cameras. Though this space is already occupied by well-established players like NVIDIA NVDA and Advanced Micro Devices, the company has the potential to solidify its foothold in this space given its track record of innovation.

Moreover, Ambarella is planning to make chips for Internet-connected security camera companies and drone manufacturers using the technologies of VisLab that the company acquired in July 2015. Furthermore, with the combined technology, the company is anticipated to target auto manufacturers later, which is yet another positive.

Ambarella, Inc. Revenue (TTM)

Ambarella, Inc. Revenue (TTM) | Ambarella, Inc. Quote

However, the company is witnessing slowing sales growth rate and deteriorating operating margin. The company, which has registered over 25% sales growth since 2012, suffered a decline for the first time in fiscal 2017. Also, its operating margin, which increased til fiscal 2016, contracted for the first time in fiscal 2017.

Notably, declining revenues from GoPro will continue to adversely impact Ambarella’s near-term performance. In fiscal third-quarter 2018, GoPro’s contribution to total revenues went down to 20.7% from 30% in the year-ago quarter, which along with softness in drone market resulted in a year-over-year decline of 11.4% in Ambarella’s overall revenues.

Moreover, the company is facing increasing threat from QUALCOMM QCOM, which is acquiring NXP Semiconductors to augment its presence in the same space. We are also apprehensive about the company’s disappointing guidance for the forthcoming quarter as well as downbeat revenue outlook for fiscal 2018.

Nevertheless, its strategic initiatives to overcome the negative impact of the decreasing contribution of GoPro and diversify poise this Zacks Rank #3 (Hold) stock well. This is also validated by its long-term earnings growth rate of 14.75%.

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