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Ambarella Inc (NASDAQ:AMBA): Don’t Call it a Comeback!

Ambarella Inc (NASDAQ:AMBA), a company that develops semiconductor processing solutions for video that enable high-definition (HD), video capture, analysis, sharing, and display worldwide (basically, super cameras), reported earnings yesterday afternoon – which were not good. But the stock is blazing higher today. It’s worth understanding how and why.

To appreciate the story, it’s important to understand the context. Ambarella first made a splash as the exclusive chip provider for sports camera maker GoPro (GPRO). Naturally, AMBA has seen its business go from boom to bust as GPRO’s cameras have lost that initial buzz and popularity that launched the company to meteoric heights.

At the same time, other highly-anticipated catalysts — such as the emergence of drones and quad-copters — never really played out to the degree AMBA had hoped.

The narrative for stock has been transformed over the past few years from that of a chronic out-performer, with one “beat-and-raise” quarter after another on high double-digit rev growth, to a chronic disappointment – a company routinely ratcheting guidance lower on slipping sales.

One glance at the chart will convey this sense of a fading star that sits now out-of-favor, leaving a trail of false-hope comeback attempts in its wake.

That sets the scene for yesterday afternoon, when the company reported what looks like very humdrum results that included another collapse in sales.

Specifically, AMBA reported Q3 EPS of $0.21, beating the $0.09 consensus, but revenue collapsed again, this time falling by a whopping 36% year/year to $57.3 million — virtually in-line with expectations.

Furthermore, AMBA issued a down-beat outlook for Q4, seeing revenue of $51.0 million, plus or minus 3%, which equates to a range of $49.5-$52.5 million, compared to the $55.6 million consensus.

Gross margin also continued to be pressured, dropping to 60.9% from 64.0% in the year ago quarter. This is mainly related to the ongoing erosion of consumer product related sales (sports cameras, wearables, drones, etc) which carry higher margins than the higher-growth surveillance cameras in China.

With the sharp decline in revenue and the softer margins, AMBA swung to an operating loss of ($9.4) million from operating income of $15.1 million in 3Q17.

In other words, it was nothin’ special, to say the least. That certainly points to the elephant in the room of this article: why the heck is stock flying today?


A New Story?

The action in the stock has all to do with the conference call and the trading context.

As described above, the world has become inured with AMBA as a chronic disappointment. Short interest is chronically high and the stock has been gradually trending toward oblivion. No one had any big expectations. Hence, given that psychological trading context, a lack of any good financial news was not surprising at all, so there was no one sitting there owning the stock because they thought the company was going to post a big beat and raise quarter. As such, there was no one to kneejerk-sell shares when they didn’t.

That’s part of the story here. But the other part is likely due to the fact that management was very upbeat on the company’s new emerging opportunities in its “computer vision” (CV) segment. This boils down to surveillance cameras and automobile camera-assisted driving.

On the topic of CV products, AMBA stated that its CV22 and CVFlow system-on-chip solutions have either one design win or are under evaluation at each of the top ten professional security camera providers. Furthermore, it is now expecting to make its first production volume shipment by the end of Q4 this year, with customer product launches by the middle of 2019.

In addition, the CVflow SoCs secured their first four automotive design wins including one ADAS camera, two e-mirror designs, and one level 4 AV short range stereo camera solution, with revenue contribution beginning in 2021-2022.

In other words, there is a thematic shift and investors are starting to see a new story here that is highly speculative but getting some tangible traction.

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