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Why Is Semiconductor Stock Ambarella Soaring Today?

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Aug. 30 2019, Published 11:24 a.m. ET

Semiconductor player Ambarella (AMBA) closed at $47.37 yesterday, 4.99% higher than its previous closing price. However, the stock is already up 19.06% and is trading close to $56.40 in today’s premarket trading session.

The 12 analysts tracking the company have an average target price of $55.00 on its stock. This target price indicates a potential upside of 16.11% in the next 12 months.

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Ambarella releases Q2 of fiscal 2020 results

Yesterday, Ambarella released its results for the second quarter of fiscal 2020. The company reported revenues of $56.4 million, a year-over-year decline of 9.7%. However, its revenues rose 20% sequentially and surpassed the consensus estimate by $4.37 million.

AMBA’s revenues surpassed its second-quarter guidance of $51.0 million–$53.0 million. The company also reported non-GAAP earnings per share of -$0.21, a year-over-year decline of 16%. However, this EPS beat the consensus by $0.11.

According to the company’s second-quarter earnings call, Ambarella’s focus centers on positioning itself as a prominent artificial intelligence and computer vision company. The company saw robust demand from large security camera customers as well as some inventory restocking activity from other customers in China. The company also reported an overall increase in market share in the global security camera market.

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Growth opportunities

Ambarella highlighted three revenue opportunities for its CV (computer vision) SOC (system-on-chip). These include opportunities demand from the professional security camera segment, the consumer security camera segment, and the automotive camera segment. Until the end of July, the company had invested about $300 million to explore these opportunities.

In the second quarter, Ambarella generated preproduction CV revenues for 40 customers. Half of these customers were from the professional security camera segment, and the other half originated in the automotive segment.

Guidance for Q3 of fiscal 2020

Ambarella projects its revenues for the third quarter of fiscal 2020 to be $63 million–$67 million, driven by CV sales in the automotive and security segments. However, the company guided for a gradual decline in the percentage of consumer electronics product sales to total revenues in the next two to three years.

According to its second-quarter earnings call, Ambarella expects increased demand for CV SOCs from established as well as emerging professional security camera makers in the second half of fiscal 2020.

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Ambarella has focused on increasing its customer base in China as well as in markets outside of China. The company has guided for higher revenues in the second half of fiscal 2020, compared to the first half. However, the company also expects a sequential decline in its fourth-quarter revenues, in line with the seasonal trends.

Ambarella guided for its third-quarter non-GAAP gross margins in the range of 56%–58%. The company expects its third-quarter operating expenses to reach $30 million–$32 million.

The company guided for a 10% tax rate in the third quarter of fiscal 2020, lower than 36% rate reported in the first quarter. Ambarella also guided for a diluted share count of 34 million in the third quarter.

Ambarella may be affected by US-China trade war

In the second quarter, Ambarella generated mass production CV revenue from three customers. While one of the customers is outside China, two are from China. The rapidly escalating US-China trade war has exposed the company to significant revenue risk. Ambarella’s shipments in China could be severely affected if the US government adds these two Chinese customers to its entity list.

Plus, the company faces other risks as a potential fallout of the trade war. These risks include unanticipated changes in tariff structures, supply chain disruptions, and market share shifts in customers. An excessive increase in tariffs can make it difficult for customers to sell their products, which could potentially impact the demand for Ambarella’s products.

According to Ambarella’s second-quarter earnings call, China ranks first as a purchaser and second as a supplier in the professional security camera market. So, geopolitical uncertainties surrounding the Chinese market have been pressuring Ambarella’s gross margins.

The company has highlighted the possibility of accelerating orders to its Chinese suppliers in the third quarter to safeguard against significant supply chain disruption. This change may result in increasing the company’s operating expenses in the third quarter.

To see how the US-China trade war affects the overall semiconductor industry, please read Semiconductor Stocks Hit by China Trade War Escalation.

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