Ambarella Stock: Pivoting Towards Computer Vision
There’s an ongoing debate about the optimal way for computers to see the world as humans can. Computer vision proposes that computers will digest a video stream in the same way our eyes do and react accordingly. LiDAR proposes that computers see using a form of radar that also supports night vision. Both methods will find applicability in particular use cases, but it ultimately comes down to software being able to digest data and provide insights.
Autonomous vehicles represent the most popular use cases for computer vision, though less sexy applications like industrial robotics might be equally lucrative. For example, think about the common security camera which Gartner considers the largest market for 5G Internet of Things (IoT) solutions through 2022. While most people think CCTV in the UK is oppressively ubiquitous, the U.S. actually has nearly twice as many security cameras per capita than the UK, and even more than China. That’s a great place to start processing data and using it to create efficiencies.
Revisiting Ambarella Stock
The last time we looked at Ambarella (AMBA) was in a piece titled Ambarella Becomes an Artificial Intelligence Stock in which we learned that “over 60% of their revenues in 2019 came from security cameras – two-thirds from the professional security camera market, and one-third from the consumer security camera market.” Our piece talked about how a pivot was taking place into computer vision as Ambarella had “spent more than $300 million on developing an AI processor architecture specifically optimized for video edge-endpoint applications.” Today, we’ll look at the progress of that pivot with the intention of deciding whether Ambarella belongs in our own tech stock portfolio.
Ambarella wasn’t focused on the right growth areas in the past, and now they’ve invested heavily in a new computer vision platform which they expect to market in a focused manner. Such a pivot might call for increased communication with investors, which is why we’re surprised to see no quarterly investor decks and a call consisting solely of audio. Fine, we’ll turn to their latest investor deck, a 108-page monstrosity presented at Capital Markets Day. Looking past all the technical data presented in the deck we continue to see forward-looking comments about the great company Ambarella will soon become. This statement from the company sums it up best:
Despite the challenges we continue to make progress in our multi-year transformationCredit: Ambarella
The multi-year transformation is indeed taking a while. It’s all supposed to kick off this year when artificial intelligence meets the internet of things: AI + IoT = AIoT.
Ambarella and AIoT
Ambarella’s new focus is on IoT endpoint applications where most of the decision-making originates from imaging data collected through the lens of a camera and/or HD radar. Yes, all those security cameras they power generate video that can be monitored by chips instead of humans. Other applications include smart locks, access control, body cams, and robotics – from mobile robots to factory automation. In vehicles, this technology will be used for advanced driver assistance solutions (ADAS) which Gartner anticipates will surpass security cameras as the largest use case for 5G IoT solutions starting in 2023.
Over 100 Ambarella customers are said to have reached production using the computer vision technology that Ambarella has developed. Most computer vision revenues for the firm have come from replacing traditional security cameras with AI-enabled cameras that have a 2X higher average selling price. Unless these cameras provide automation, it wouldn’t make sense for customers to pay this higher price. Over 70% of Ambarella employees are software engineers which means they’re probably building functionality into their hardware that could make the 900 million installed cameras under their umbrella capable of moving from “human viewing” to “machine viewing” for an added subscription fee.
The most information we’re provided on the source of Ambarella’s revenues comes from the below chart which shows a reduction in granularity starting next year with two reporting segments remaining – IoT Non-Automotive and IoT Automotive.
From then on, automotive applications are expected to grow to become nearly 70% of total revenues by 2028. It’s a “build it and they will come” approach that assumes they’ll succeed in the face of other firms dabbling in this space, like the world’s largest semiconductor company – NVIDIA (NVDA) – and the full stack autonomous driving platform they’ve developed. With around $20 billion on their books, NVIDIA has the cash needed to grow their autonomous driving franchise in the wake of whatever the current bear market might throw their way. Contrast this to the $200 million in cash/cash equivalents held by Ambarella which are being depleted at an increasing rate as operating income plummets.
Having to raise capital – whether through equity or debt – in a bear market won’t do their share price any favors, and we also need to consider other risks looming in the shadows.
We’re also seeing a slowdown in revenue growth on a quarterly basis, something that’s attributed to supply chain issues and customers reducing their levels of inventory. Everything to the right of the red dotted line below shows what has transpired since the last time we looked at Ambarella.
Growth resumed through 2021, then stagnated, and began declining with the most recent quarter. Trying to figure out the source of the declining growth is difficult aside from the company telling us it relates to China’s lockdown, supply chain challenges, and customers facing assembly problems. Speaking of China.
Ambarella’s Asia Exposure
A distributor named WT Microelectronics has historically accounted for around 60% of Ambarella’s revenues. Having customer concentration risk with a distributor is less concerning than having the same with an end custo+mer, but it also obfuscates where sales are happening. Somewhere around 83% of Ambarella’s sales are said to come from Asia, but we don’t know where the end customers reside, so we don’t have any geographical breakdown showing revenue diversification by geography or customer. More importantly, we don’t know how Ambarella might be impacted by the deteriorating U.S./China relationship.
Investing in Ambarella Stock
When we consider investing in any stock, we expect a degree of transparency that allows retail investors to easily gauge how their investment is progressing. When a firm like Ambarella pivots, they owe investors information that provides color as to how their pivot is coming along. The below mess of a chart is supposed to provide evidence that their computer vision solutions are growing successfully, but it’s hardly convincing – even if you can make sense of what it’s trying to convey.
The growth of Ambarella’s opaque business depends on their ability to displace formidable competitors like NVIDIA, all while making sure their security camera cash cow doesn’t run into problems. Similar to the last time we looked at Ambarella, we see a company that wants investors to bet on future possibilities as opposed to what’s happening today.
For those considering an investment in Ambarella, shares have lost 68% of their value since the beginning of the year compared to a Nasdaq loss of 27% over the same time frame. You’d be paying about the same price for shares as when we last looked at the company in 2020. Ambarella currently commands a simple valuation ratio of 8 which is about the average of the 190 companies we calculate this for in our tech stock catalog. Given what we’ve discussed today, we’ll be removing the company from our tech report and leaving it in our catalog as an “avoid.” If quarterly revenues crest the $100 million mark, that will mean their plan is working and we’ll come back for another look.
Promises of future prospects become less compelling in a bear market. Ambarella talks about numerous potential growth areas for the computer vision platform they’ve spent 5 years and 100s of million developing, while expecting automotive to be their dominant focus going into 2028. Investors need to trust the company can accomplish what they say in the face of stiff competition, economic indicators that are worsening, and a depleting capital base. This isn’t a firm we’d consider investing in given the current headwinds they’re facing.
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