Why Ambarella, Inc. Could Be a Gold Mine for Growth Investors

Ambarella (NASDAQ: AMBA) shares are trailing the market by a wide margin this year. The camera tech specialist surprised investors by lowering its sales outlook in early September, and the new forecast puts it on track for a second straight year of declining revenue. That's a problem for a stock that's priced for rapid growth.

Recently, I highlighted a few reasons Ambarella could continue struggling. Today, I'll look at the other side of the trade: the best reasons to be bullish about its long-term growth potential.

The case for patience

Ambarella has a deep bench when it comes to developing technology around video processing and delivery. Its core engineering team has worked together for over 15 years, and these specialists have produced several innovations that pushed the industry forward, including the first ultra-high-definition system-on-a-chip and a widely used video compression platform.

This central team is surrounded by a company that's built for innovation. Over 80% of Ambarella's employee base is dedicated to engineering. Management devotes over $100 million, or one third of sales, to research and development.

This type of work often takes years to commercialize, and it doesn't often translate into consistent revenue gains. But Ambarella has plenty of good company in this struggle. NVIDIA (NASDAQ: NVDA), a key competitor in the drone market, endured a 4% revenue decline in 2014 and a minor uptick in 2016 before sales growth really caught on in the most recent fiscal year.

NVIDIA's success doesn't mean Ambarella will enjoy similar gains, but it's a good reminder that design innovation takes time.

Extending its reach

NVIDIA's phenomenal growth was powered by success at extending its chip design dominance beyond PC graphics and into high-growth fields like visual computing, AI, and automobile tech. Ambarella has a similar strategy at work today, with management doing its best to diversify into areas far from the sports camera field that has driven sales growth lately.

The company is casting a wide net right now. This year, its technology has been featured in new products ranging from body-worn police cameras to home security cameras with advanced face recognition, to HD baby monitors. It continues to push deeper into the drone niche, even though industry leader DJI went with a competitor's solution for its flagship Spark product. Ambarella's tech made its way into Garmin's latest dashboard camera, which records a 180-degree view in front of an automobile while also detecting a collision risk.

None of these products are likely to spark quick sales gains for the company. The drone segment should shrink this year, in fact, and the emerging virtual reality segment isn't growing as quickly as management had expected. These disappointments formed the basis for Ambarella's new revenue target calling for sales to drop by 5% at the midpoint of guidance rather than hold steady, as they had predicted earlier.

The good news for investors is that the wide application of its technologies in new products supports the idea that Ambarella is still leading in camera tech semiconductor design. Looking ahead, executives are excited about the long-term potential in the field of computer vision, and the company is rolling out its first comprehensive chip solution to meet that need right now. If everything goes according to plan, this will be just the first of many generations of computer vision hardware that Ambarella releases over the next few years as it builds on the early, but fragile, lead it enjoys in low-power, high-definition video camera tech.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and Nvidia. The Motley Fool has a disclosure policy.