Will Ambarella's Rebound Momentum Hold?

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Investors are starting to grow cautiously optimistic that video tech specialist Ambarella (NASDAQ: AMBA) could break out of its sales funk soon. There are even hints that its new line of computer vision chips could power a growth cycle for the company that's both bigger and more sustainable than its previous consumer-tech driven spikes.

But first, Ambarella needs to demonstrate that it can win market share in a competitive sales environment this year to take full advantage of its considerable engineering prowess. The first real opportunity for inventors to get a sense of whether that's happening will be on Tuesday, when the company announces its fiscal first-quarter results and updates its 2019 outlook.

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Getting back to growth

Ambarella's sales fell hard in 2018, and that decline is projected to continue through Q1. Most analysts who follow the stock are expecting a 17% drop in sales to $47 million.

That figure syncs up with the forecast CEO Fermi Wang and his team issued back in March. The challenge is that demand is shrinking for Ambarella's consumer electronics tech in areas like drones and sports cameras. So far, those slumps have not been fully offset by its sales growth in the security camera and autonomous-driving tech markets.

Ambarella is hoping that its shift into computer vision, which started in earnest last year, will help return the company to growth beginning in the second half of 2019. Its latest generation of CV chips just entered mass production, and more customers have now had a chance to stack them up against rival hardware. We'll find out on Tuesday whether its designs are winning market share in the emerging CV industry -- which would confirm that management made the right choice in pivoting the company away from its previous focus on video processing.

Trade war challenges

Ambarella shareholders are happy that the company's performance isn't as dependent on sales of GoPro's action cameras as it once was. But a new customer-specific threat has shown up in recent weeks.

Investors sold off Ambarella shares in late May in response to news that the U.S./China trade war could sink security camera sales for a few of the company's largest customers. Executives don't usually discuss specific contracts now that GoPro's impact on sales has declined, but the prospect of a trade-based slowdown might warrant a few comments from Wang and his team about the outlook for this important niche. At the very least, management's 2019 forecast might be adjusted to reflect the new risks.

Transformation updates

Steady growth in the security camera segment will be important, but Ambarella's longer-term success will depend even more on how well it fares in winning other buyers over to its computer vision designs in the next few quarters. The company also needs wins in industries like autonomous driving -- and with the major competitors -- to build itself a defensible position in that soon-to-be massive market.

Those are significant challenges that suggest most investors should watch this stock from the sidelines. A good investing outcome here would rely on Ambarella proving that it has a clear path back to sales growth and stabilized profitability. Unfortunately, that's not proof that its Q1 results are likely to deliver.

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