Drone Headwinds Circle Ambarella Inc (AMBA), But Can Long-Term Computer Vision Roadmap Save the Day?

Ambarella Inc (NASDAQ:AMBA) shares are falling close to 11% after the chip maker may have come in just over consensus expectations as far as earnings, but drone weakness has kept some investors at bay.

Oppenheimer analyst Andrew Uerkwitz approaches Ambarella from the sidelines, neutral until hearing further on how the company’s computer vision product line pans out down the line. In reaction to the mixed print, the analyst reiterates a Perform rating on shares of AMBA without listing a price target.

For the first fiscal quarter of 2018, AMBA brought in revenues rising 12% year-over-year to $64.1 million, outclassing consensus estimates of $63.5 million as well as the analyst’s projections calling for $63.4 million in revenue. Uerkwitz attributes revenue strength to a one-two punch of robust results from the company’s professional and consumer IP camera segment. Meanwhile, the chip maker hit $0.39 in EPS this quarter, ahead of estimates from both consensus and the analyst looking for $0.36. However, gross margin saw a quarter-over-quarter dip from waning margin low-end IP camera and drone sales. The AMBA management team has maintained fiscal guidance for the year of 2018 and expects revenue for the second fiscal quarter between a range of $69 to $72 million, gross margin of 62 to 63.5%, operating expenses between $26 and $27.5 million, and non-GAAP tax of 15%.

Subsequently, the analyst tweaks his expectations for fiscal 2018, taking revenue from $314 million to $310 million and non-GAAP EPS from $2.29 down to $2.23, along with changing fiscal 2019 forecasts, keeping revenue at $320 million, but cutting $2.23 down to $2.16 due to elevated tax assumptions.

Drone sales weak performance could arise from product release timing as well as the tier-2 drone maker’s growth prospects not coming in as strong as once anticipated. Additionally, the analyst fears rival DJI’s rising competitive edge in the consumer drone arena could impact AMBA’s drone clientele growth.

Uerkwitz notes, “IP camera, wearable camera (excluding GoPro) are performing ahead of expectations while drone business is seeing some weakness due to slower-than-expected growth among tier-2 drone makers. Accelerating adoption of low-end HEVC solution among Chinese security camera customers and momentum in North American consumer IP camera are the main sources of strength. Management outlook for drones turned more negative, no longer expecting Y/Y growth for FY18 due to DJI’s dominance over other tier-2 competitors. Our neutral stance on AMBA remains unchanged. We expect the stock to perform sideways until the company announces more details on the commercial outlook of its computer vision products.”

Overall, “We remain on the sidelines while the company sorts through near-term growth issues with key customers (GoPro and DJI). We look forward to catalysts in C2H17, when management provides more details on the commercial outlook and customer profiles of its computer vision products,” the analyst concludes.

Top analyst Matt Ramsay at Canaccord chimes in with a conversely bullish take, understanding the chip maker may have some “transitional quarters” in its short-term, but a long-term “important computer vision roadmap on track.” Seeing a bigger picture beyond a temporary time of transition, the analyst reiterates a Buy rating on AMBA with a price target of $72, which represents a 35% increase from where the stock is currently trading.

For the first fiscal quarter of 2018, the analyst looked for AMBA to bring in $63.5 million, along with consensus, with non-GAAP gross margin expectations of 63.8% that were beaten by Ambarella’s 64.3%. However, despite gross margin outperforming the analyst’s expectations, it nonetheless still saw a quarterly decline on back of a softer margin product mix coupled with “no further tailwind from sales of previously written down inventory.” Even considering “drone headwinds,” on a positive note, non-GoPro sales experienced a 16.1% year-over-year surge, with non-GAAP EPS of $0.39 coming in ahead of the analyst’s $0.36 forecast. However, non-GAAP operating expenses of $25.7 million hit under the analyst’s $26.7 million projection.

Looking ahead to the second fiscal quarter of 2018, AMBA management’s midpoint revenue expectations of $70.5 million, denoting a 9.9% quarter-over-quarter incline fall under the analyst’s $75.3 million forecast amid drone weakness that are “offsetting growth in other end markets.” Meanwhile, another reflection of drone weakness as well as a rise in China security revenue mix is the non-GAAP GM outlook of roughly 62.8% at the midpoint. AMBA guided operating expenses to $26.8 million at the midpoint amid a rise in “headcount” coupled with R&D expenses. Therefore, the analyst has cut back on his fiscal 2018 non-GAAP EPS expectations, pulling back from $2.20 to $2.10 as well as reducing his estimate for fiscal 2019 non-GAAP EPS from $2.68 to $2.50, attributing caution to “slightly higher operating expense and materially higher tax rate estimates.”

Ramsay surmises, “Overall, we believe the company remains in transition and could experience volatility, both in terms of results and share price, until the computer vision family of products is detailed further to investors, begins to drive revenue in 2018 and returns Ambarella’s products to clear differentiation and higher ASPs/margins starting in mid-C2018. With our bullish technological thesis regarding the powerful combination of high-fidelity video processing and hardware-accelerated computer vision across the drone, automotive, security and robotics markets, we reiterate our BUY rating and $72 price target.”

According to TipRanks, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, analysts Andrew Uerkwitz and Matt Ramsay have a yearly average return of 8.3% and 26.9%. Uerkwitz has a success rate of 54% and is ranked #601 out of 4,571 analysts, while Ramsay is a top five-star analyst with a success rate of 71% and a high ranking of #35 out of 4,571 analysts.

TipRanks analytics indicate AMBA as Buy. Out of 7 analysts polled by TipRanks in the last 3 months, 3 are bullish on Ambarella stock while 4 remain sidelined. With a return potential of 21%, the stock’s consensus target price stands at $64.72.


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