Here's Why the Best is Yet to Come for Ambarella, Inc.

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Shares of Ambarella (NASDAQ: AMBA) are down more than 9% over the past month, hurt by disappointing guidance that overshadowed its otherwise solid fiscal first-quarter report last month. 

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But with shares now trading near a 52-week low, now could be a great chance for long-term investors to open or add to a position in the video processing chip specialist. Let's take a closer look at what led to Ambarella's current business situation, as well as a key growth opportunity that could drive a longer-term rebound in its share price in the coming quarters.

On GoPro, drone market headwinds

When Ambarella announced fiscal fourth-quarter 2017 results in March, management revealed that GoPro (NASDAQ: GPRO) is likely incorporating a competitive chip in at least one of its new camera products later this year. Of course, that's disappointing from an investor's standpoint considering GoPro comprised a full 34% of Ambarella's total revenue during the quarter, thanks to the launch of its new HERO5 series cameras. But it wasn't entirely surprising, either, given industry rumblings of such a development and considering Ambarella has always been clear about competitive threats in its industry.

At the same time, Ambarella took a conservative approach to modeling GoPro revenue in more recent quarters, primarily as high inventory levels for GoPro cameras using Ambarella's solutions have crimped overall growth. As a result, Ambarella largely spoke in terms of growth excluding GoPro in its latest quarterly report last month, to give investors perspective on the relative health of the rest of its business.

Thankfully, that perspective was encouraging. Revenue excluding GoPro rose 16.1% year over year last quarter, thanks to strength in the automotive, wearable camera, and professional and consumer IP security camera segments.

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However, Ambarella faces yet another challenge with impending headwinds in the current quarter from the drone/flying camera market, where it faces a combination of difficult comparisons against a particularly strong year-ago period, given timing of new product launches. In addition, tier-2 customers are muscling into the industry and using competitive chips in their lower-cost drones. 

A vision for success

But Ambarella management also predicted that revenue from Chinese drone leader DJI will climb this year from 2016 in spite of lower-cost drone options. And if its headwinds in flying cameras continue past this quarter, the company is confident that revenue from its other thriving non-GoPro markets should more than offset any shortfall. As such, Ambarella felt comfortable reiterating its full fiscal year 2018 outlook for revenue of plus or minus 3%.

What's more, Ambarella is excited by its position to benefit from a key technological development in the coming quarters: Computer vision. That is, chips that enable devices to analyze and respond to the world using the information they collect from digital video.

For example, Ambarella's computer vision chips will help enable things in the automotive industry like electronic mirrors that can "see" blind spots, parking assist sensors, and autonomous driving systems. Ambarella has also developed the technology underlying a recently introduced baby monitor that uses computer vision to learn how the baby moves, and inform parents if the child is awake or sleeping. 

As it stands, Ambarella's first computer-vision chip, aptly dubbed "CV1," is on schedule to ship to customers before the end of 2017. Starting next year, the company anticipates developing and delivering two to three new computer-vision chips per year at multiple price and performance points.

During last quarter's conference call, Ambarella CEO Fermi Wang elaborated on computer vision's long-term promise:

In addition to continuing to grow growth opportunities in our existing market, we see the combination of video with computer vision technology as a primary driver of new activities in both current and emerging markets, including OEM automotive and robotics. Our investment in the development of new family of computer SOCs to enable our customers next generation of advanced video cameras will be the foundation for the future expansion of our business.

In short, though Ambarella is certainly facing challenges with GoPro and in the drone market, it has plenty of irons in the fire to reward shareholders going forward. As such, I think the best is yet to come for Ambarella.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.