Why Ambarella, Inc. Stock Dropped Today

What happened

Shares of Ambarella Inc. (NASDAQ: AMBA) fell as much as 13.6% early Friday, then recovered to close down 3.6% after disappointing guidance overshadowed the video-processing chip specialist's solid quarterly results.

Regarding the latter, Ambarella's revenue declined 12.8% year over year, to $62.5 million, in line with guidance provided in June for a range of between $60 million and $64 million. That translated to adjusted net income of $8.5 million, or $0.25 per share, down from $0.56 in the same year-ago period but comfortably above analysts' consensus estimates for earnings of $0.13 per share.

So what

This quarter included immaterial revenue from GoPro, which was formerly Ambarella's single-largest customer but shifted its business to new custom-made SoCs for its latest cameras over the past year.

During the subsequent conference call, Ambarella management explained that, while revenue from the IP security and automotive OEM camera markets grew year over year, lower sales related to consumer applications -- think non-GoPro sports cameras, virtual reality, and drones -- more than offset that strength.

Now what

Worse yet, Ambarella anticipates consumer applications revenue to remain under pressure in the near term, and offered guidance for third-quarter revenue of between $55.5 million and $58.5 million. That's down 36% year over year at the midpoint, and far below consensus predictions for $73.5 million.

"While we are disappointed with our near term outlook, we remain confident that our decision to focus on computer vision applications in the IP security, automotive and robotics AI markets is the correct strategy and is already bearing fruit," added Ambarella CEO Fermi Wang. "We have delivered our CV22 and CV2 computer vision chips to customers, and their evaluation results are very encouraging."

Still, investors hate being told to wait. Until Ambarella starts demonstrating more tangible results from its early computer-vision initiatives, I think the stock will likely remain depressed.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has a disclosure policy.