This past year has been eye-opening, especially for new investors.
The stock market sell-off has resulted in some stocks falling by as much as 90% from their all-time highs. Even technology stocks that outperformed during most of the past decade, including the “FAANG” stocks plummeted. Variables such as supply chain issues, rising interest rates, sky-high inflation, COVID-19, and the war in Ukraine added to a long list of macroeconomic headwinds.
In response, many investors have gravitated towards safer bets to protect their portfolios, investing in value stocks, energy companies, commodities and gold. This transition has been bad news for the tech sector — but good news for longer-term focused investors buying the dip.
Although not all falling stocks are a buy, there is one tech stock that could make an impressive comeback, and when it does, investors who buy shares now should enjoy significant returns. That stock is Ambarella.
What Is Ambarella?
Ambarella (NASDAQ: AMBA) is a semiconductor design company specializing in computer vision chips and image processing SoCs (system on chips).
The company’s products are used in many applications, ranging from autonomous driving and robotics applications to video security — for example, its image-processing SoCs process videos and photos for drones, cameras, and other gadgets. The company’s computer vision chips allow security cameras to identify faces, guide driverless vehicles, and enable other AI-related tasks.
The company faced some challenges, including stalled GoPro growth and competition from Intel, but its revenue growth is still set to accelerate year over year.
Despite impressive top line numbers, shares of AMBA have been hammered, crashing by around 60% this year. When looking to the future, is this dip justified? If not, is now the time to buy?
Have Investors Overreacted?
Following the release of the company’s fiscal 2022 fourth-quarter results, shares of AMBA plunged by over 30%.
While Ambarella’s guidance was slightly below Wall Street’s expectations, many analysts believe investors may have overreacted. This chipmaker is growing at an impressive pace and is currently built for long-term growth. 2023 revenues are forecast to come in at $346 million, 2024 revenues at $433 million and 2025 revenues at $559 million.
The stock is trading much closer to its 52-week low of $65.60 than its 52-week high of $227. But will shares rebound?
A Closer Look at the Numbers
AMBA’s fourth-quarter and fiscal year 2022 financial results were impressive.
- Fiscal 2022 fourth-quarter revenue increased 45% year-over-year, reaching $90.2 million.
- Full-year revenue hit $332 million, representing an increase of 49% compared to 2021.
- Adjusted earnings for the year increased to $1.61 per share, up from $0.33 per share the previous year.
So, what was the issue?
Investors reacted poorly to the company’s guidance. Yes, the company’s guidance missed the mark slightly. But the fundamentals remain largely sound in spite of macroeconomic headwinds. Plus, the company is tethered to industries set to grow rapidly in the coming years.
Here are some highlights from Ambarella’s first quarter of the fiscal year 2023, which ended April 30, 2022.
- The company’s gross margin was 62.6%, compared with 62.4% for the same period in fiscal 2022.
- Revenue is expected to be between $78.0 million to $82.0 million for the second quarter of the fiscal year 2023, ending July 31, 2022.
Is AMBA a Buy?
For those strictly interested in the near term, AMBA will continue to face challenges. The pandemic flare-up in China will likely affect orders and the company’s supply chain. However, the chip shortage is not unique to AMBA and does not reflect a specific issue with the company. Underlying demand is high suggesting AMBA is well-positioned long-term.
Most of AMBA’s revenue comes from these two chip applications — security cameras and automotive, which present attractive opportunities, especially as autonomous driving gains traction.
In particular, increasing AI-based applications should support rapid growth for years to come. The market for AI-enabled computer vision alone is forecast to grow at an annual rate of 39% through 2030, hitting $207 billion in revenue.
The company’s bottom line is expected to rise at a compound annual growth rate of 87% over the next five years. At current prices, now could well be the time to get into Ambarella at an attractive valuation. Analysts agree that once this company hits its true potential, the upside is huge. The consensus price target for AMBA is $119.75, close to 50% above the current share price.