Transforming a business can be difficult. Just ask video- and image-processing chipmaker Ambarella (NASDAQ: AMBA), which has been weaning itself from the action-camera and broader consumer electronics industry over the last couple of years. The company has been doubling down on industrial end markets instead, but stiff opposition awaits there, too.
On Ambarella's second-quarter earnings call, CEO Fermi Wang was asked if his company's new computer-vision chips are going to run into competition from NVIDIA's (NASDAQ: NVDA) work on autonomous vehicles. His reply was that the two companies' products are more complementary to each other than many investors think and that Ambarella's real competition is Mobileye, which was bought by Intel (NASDAQ: INTC) in 2017. If that's true, an Ambarella-NVIDIA tag team, in some shape or form, could be a win-win for both companies in the fledgling autonomous-vehicle industry.
What the two companies do
NVIDIA is a leader in the advanced driver-assistance systems (ADAS) and autonomous-vehicle industries. The chipmaker provides a complete solution for automakers and developers, including artificial-intelligence-powered processors, sensors, and software. Revenue for the company's automotive division increased 8.5% in the first half of fiscal 2019, reaching $306 million.
Ambarella makes most of its hay these days in the security-camera industry, but revenue from automakers has been building. The chipmaker is a leader in providing car recording systems in the Chinese market and is trying to get its video tech into other auto uses like ADAS systems. Management sees sales from the auto industry reaching more than 20% of its total revenue by the end of 2018. Ambarella's revenue is currently on track to fall 21% this year, to $232 million.
Investors are pinning their hopes on Ambarella's new computer-vision chips, which are finding their initial application in the high-definition security-camera industry. However, management says that its new tech is being assessed for use in ADAS (a market dominated by Mobileye), as well as in fully autonomous systems, where it would complement work that NVIDIA has already done in that department.
Ambarella's pain could be NVIDIA's gain
The two technology companies' fortunes have been headed in opposite directions for the last couple of years. While NVIDIA has been finding new uses for its graphics-processing products in data centers, autos, and professional visualization -- while enjoying continued growth in the video game industry -- Ambarella desperately needs a win from its computer-vision products. Revenue from a security-camera manufacturer is expected to start rolling in during the first half of 2019, but CEO Wang said sales from industrial robotics and autos will take longer. That's likely due to competition from Mobileye (which grew 37% year over year last quarter, according to Intel) on the auto side and Cognex in industrial robotics.
Ambarella contends that its vision chips are superior to anything else on the market right now, but converting that into growth is challenging. That's where NVIDIA could come in: It's growing its new end markets, but at a slower pace than its bread-and-butter video game business. Gaming revenue rose 52% last quarter, compared to 26% growth for the rest of the company.
Pairing up with Ambarella -- be it through a sales partnership or an acquisition -- could bolster NVIDIA's presence in the nascent self-driving auto industry and rekindle growth in its auto division.
Ambarella would benefit from NVIDIA's marketing and sales prowess, not to mention access to deeper pockets while new uses for computer vision are still under development. After several years of decline, Ambarella's enterprise value sits at $890 million, and it could head lower if sales keep sliding over the next few quarters as management anticipates; NVIDIA is currently hauling in over $3 billion in sales every quarter.
Of course, this potential partnership between NVIDIA and Ambarella is just my speculation and isn't rooted in any public announcement. However, since the two companies complement one another in the ADAS and self-driving-car departments, a tying of the knot would make a lot of sense.
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