Ambarella AMBA has been performing well, with its shares gaining 21% in 2024. Despite this surge, the stock underperformed the Zacks Electronics - Semiconductors industry, the Zacks Computer and Technology sector and the broader S&P 500’s growth of 66.1%, 34.6% and 25.3%, respectively, over the same period.

Despite this relative underperformance, Ambarella's strategic focus on AI, automotive and Internet of Things (IoT) markets underscores its potential for future growth.

Strength in AI, Auto and IoT Market Aids AMBA

Ambarella is a dominant player in the computer video solutions-based SoC market. To increase its foothold in this market, AMBA is now developing artificial intelligence (A)-based SoCs, branded as CVFlow. AMBA’s CVFlow architecture-based AI inference processors, including CV3, CV2, CV5, CV25 and CV22 SoCs, are gaining popularity and receiving positive feedback from customers. Ambarella anticipates that the CV family to be the key driver of its revenue growth in fiscal 2025.

Ambarella’s automotive and IoT businesses are growing rapidly with strong traction for its AI-SoCs in the ADAS market. Ambarella is also expanding its customer base with the launch of new products like CV3-AD655 AI SoC targeting advanced Level 2+ autonomous driving applications. AMBA is also looking for opportunities in the advanced IoT applications space and plans to develop a 2-nanometer chip to address next-gen AI platform requirements.

With all these developments in place, Ambarella anticipates its fiscal 2025 revenues to grow in the range of 22-24%. The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $279 million, indicating year-over-year growth of 23.2%.

Ambarella Price Performance Chart

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Near-Term Headwinds for AMBA

Ambarella is facing significant competitive pressure from NVIDIA NVDA, QUALCOMM QCOM and Mobileye MBLY in the advanced automotive market. The situation is worsened by the emergence of new Chinese players in this domain, which includes Horizon Robotics. The U.S.-China trade war is also weighing down on AMBA’s prospects due to tightened regulations or trade restrictions.

AMBA’s CV2 is in direct competition with NVIDIA’s Xavier chips. Ambarella’s automotive chips also compete with Qualcomm’s Snapdragon 602 Automotive Platform and Mobileye’s Shield and Connect solutions. Additionally, Ambarella has long been facing a slowdown in sales of its high-margin action cameras after its loss of business from GoPro and persistent softness in the drone market. These factors are holding the company back from realizing its full potential.

Moreover, its shift in focus from legacy products to newer products is weighing on the gross margin. For instance, the adoption of Level 2+ autonomous systems has been slower than expected among enterprise customers, while the development costs have remained high. Ambarella also expects weak fiscal fourth-quarter 2024 results due to the seasonality of its business. These factors are concerning for AMBA’s near-term performance.

What Should Investors Do?

Ambarella’s strong positioning in AI, automotive, and IoT markets, coupled with innovative product launches, provides a promising foundation for long-term growth. While the company faces near-term challenges, its efforts to capture emerging opportunities in high-growth sectors indicate a solid recovery trajectory in 2025.

For now, holding Ambarella stock seems prudent. The company’s commitment to technological innovation and its focus on capturing market share in transformative industries make it a compelling player to watch.  AMBA currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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