Ambarella (NASDAQ: AMBA) investors have started losing hope of a turnaround as the chipmaker is finding it difficult to deliver growth amid stiff competition and a challenging end-market scenario. The video processing chip specialist's forward guidance was below Wall Street's expectations once again when it released its fiscal second-quarter results on Aug. 31.
This set the cat among the pigeons as it shows that Ambarella's business is on the wane. In fact, the midpoint of the company's third-quarter guidance indicates that its revenue could drop around 11% year over year. Not surprisingly, investors pressed the panic button -- sending the stock down 22% the next day -- as Ambarella's growth story now seems questionable.
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Drones don't guarantee a flight to safety
Drones could have been the next big growth frontier for Ambarella, but that doesn't seem to be the case anymore. CFO George Laplante said during the conference call with analysts that the company's drone-related revenue fell last quarter because of weak demand from "tier 2" drone customers. He did not give a dollar figure. The bad news is that Ambarella's drone business doesn't look to pick up anytime soon. The company said it expects continued weak drone sales.
Laplante said the recent launch of a lower-priced Spark drone from DJI has impacted the high-end segment of the drone market where Ambarella supplies chips.
And Ambarella might be forced to lower the price of its drone chips because of rising competition. Qualcomm (NASDAQ: QCOM), for instance, has been making big moves in the drone market with its machine learning-equipped Snapdragon Flight Drone platform.
Qualcomm's platform enables the drone to learn about its environment on the go, making decisions instantly and creating flight paths to avoid obstacles in crowded environments. This has helped the chip giant eliminate the need for global positioning system satellites, which means that the drones can be used in indoor environments where connectivity might have been an issue.
Additionally, Qualcomm is focused on making drones affordable. It believes that it can reduce 4K-camera drone prices to $300-$400 and boost the flight time concurrently, which means that Ambarella could be forced to lower prices to compete against Qualcomm's chips.
Ambarella customers are multisourcing their chips
Ambarella once enjoyed solid growth, as customers such as GoPro and DJI Innovations primarily relied on its chips for powering their drones and cameras. GoPro was once its largest customer. But weak sales of the former's action cameras and the decision to rely less on Ambarella as a supplier have hurt the chipmaker's sales tremendously.
GoPro is reportedly moving to its own system-on-a-chip in the second half of 2017, which means that Ambarella will lose its hold on the action camera market. Meanwhile, Ambarella's primary drone customer -- DJI Innovations -- seems to be multisourcing its chips as well. DJI is reportedly not using Ambarella chips in its Spark drone.
The use of non-Ambarella chips in GoPro and DJI products puts the brakes on Ambarella's growth in both the action-sports camera and the drone markets, because GoPro and DJI are leaders in these areas, respectively. More specifically, action camera sales could grow at almost 23% a year until 2021, while drone sales are expected to clock an annual growth rate of 7.6% over the same period.
Ambarella is losing access to two fast-growing markets that could have substantially boosted its business in the long run and this is dimming investor hopes of a turnaround.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.