Ambarella’s Computer Vision Chips Won’t Move the Needle in 2018

It seems that anything these days with the words “autonomous driving” attached to it carries some level of controversy. Video chipmaker Ambarella (NASDAQ: AMBA) is no exception. But the thing is, the company isn’t really in that industry — at least not yet. Shares were hammered after the company reported on its first quarter, which ended April 30, because of further declines in its action camera (read GoPro) and drones business. So developing new chips for the future of transportation can’t come soon enough for Ambarella.

A bad quarter, but an expected one

Ambarella’s sales fell 5% in 2017, and they declined another 11% to kick off 2018. That was to be expected, though, as management had called for a 10% to 15% decline in the quarter a few months ago. Adjusted earnings, which backs out things like stock-based compensation to employees, fell to $0.13, compared with $0.44 a year ago.

The blame could be laid solely on drones, sports cameras, and virtual reality cameras, all of which fell enough to offset the growing IP security camera and automotive markets. That’s the good news, as tech-enabled cameras for business and for various automotive uses are keeping business afloat. The progress on those fronts has been only “steady,” though, according to CEO Fermi Wang on the last conference call. The search for a new growth driver continues.

Image source: Getty Images.

And that’s where computer vision comes in — technology that gives electronic systems the ability to “see” and react accordingly. Ambarella has been developing new chips that use the technology, and applying them to self-driving cars and security cameras. This gives investors hope that those burgeoning markets will provide an antidote to Ambarella’s lumpy revenue results the last few years.

Data by YCharts.

Another not-great quarter ahead

Even though Ambarella delivered a quarter that was not great but better than estimated, it’s the future that really matters. And even while Ambarella’s developments could rekindle growth, that’s not likely to happen in the second quarter. Management said that revenue will decline anywhere from 10.6% to 16.2% from a year ago.

In fact, 2018 may not be the year it happens at all. In answering an analyst question about sales and timing, Wang said developers are buying the new vision chips and systems, but those sales aren’t likely to move the needle much. Early adoption is taking place, especially in advanced driver assist systems; total industry spending on vision chips for those systems is expected to reach $2 billion by 2020. Ambarella’s total sales were $310 million in 2017, so even a slice of that market would be significant. But robust automaker spending on those chips still looks to be a way off.

While there is plenty of hope buried in the first-quarter report, investors will have to continue exercising patience as tangible results were not forthcoming. The good news is that the chipmaker has weaned itself off sports action cameras, and is pursuing more sustainable industries. That should help keep business chugging along while a new growth engine is developed.

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Nicholas Rossolillo and his clients own shares of Ambarella. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has a disclosure policy.

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