Poor Ambarella (NASDAQ: AMBA). In spite of exceeding expectations during the 2020 fiscal year's first quarter, declining business results aren't showing any signs of reversing. The beleaguered chipmaker is sitting on a huge opportunity with its computer vision (CV) technology, but turning tech into cash is easier said than done. There were a small handful of reasons for optimism after the most recent report card, but investors will need to continue exercising patience with this stock.
What happened in Q1
After a total drubbing in 2018, in which Ambarella's sales fell 23%, there was no relief to be had in the first quarter of fiscal year 2020 (the three months ended April 30, 2019). Sales fell another 17%, and gross profit on product sold suffered as a result. The company reported results on June 4 and did better on the top and bottom lines than analysts had expected. In the meantime, operating expenses grew 3% in the quarter -- primarily attributable to research and development costs as the company keeps its foot on the gas with its CV products.
The accountants at Ambarella had to continue using red ink on the bottom line, and even adjusted earnings (which backs out stock-based compensation and other one-time items) were near running at a loss. The good news is that the company continues to make announcements that it is working with manufacturers to implement its CV chip designs into auto and camera products -- everything from automated parking assist features to ultra-high-definition security cameras with facial recognition.
Nevertheless, Ambarella management sees CV monetization taking place in three waves: professional security cameras, consumer security cameras, and automotive. The first wave isn't expected to contribute materially to results until next year, and automotive -- the biggest opportunity for Ambarella -- won't start kicking in until 2022 or 2023.
Tariff trolls are guarding the CV bridge
Ambarella's CV development can't come soon enough. Even if applications for CV were up and running at full speed right now, it still might not be enough to offset some short-term pain. The U.S.-China trade war stands to be highly disruptive to this semiconductor maker's business as it has significant operations across the Pacific. CEO Fermi Wang had this to say on the earnings call:
Case in point: Second-quarter revenue is expected to be $51 million to $53 million -- another 9% year-over-year decline. However, that includes some orders getting pulled forward, as Wang said some customers rushed to make purchases ahead of tariff implementation. If the new taxes prove to be disruptive over the longer term, things could get much worse later on in the year.
It isn't a pretty situation for a company that was already trying to make a transition away from its legacy consumer goods end market into newer applications. Geopolitics are now a major headwind as well, which means things are likely to deteriorate more before they get better. However, CV still presents significant opportunity in the years ahead. But there's no need to rush in and buy the stock now. A full-blown CV revolution is still some time off.
10 stocks we like better than AmbarellaWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Ambarella wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 1, 2019