Despite the market's struggles with traction, signs of an imminent rebound grow for Ambarella (NASDAQ: AMBA). The Q4 results were solid despite the YOY contraction, and the guidance catalyzed a shift among analysts. The analyst's sentiment toward Ambarella has been steady at a Moderate Buy for years, but the price target suffered ahead of the release. The consensus target fell over 20% in the last twelve months but hit bottom with the Q4 release.
Marketbeat.com tracks three analyst revisions that favor higher share prices following the release. Two include upward price target revisions, and all targets are above the consensus. The single reiterated target of $90 is $17.50 or 23% above the consensus, which suggests a solid upside for the stock. The consensus target is already 32% above the price action, and the analysts' range suggests a deep value opportunity is still available. Ambarella stock is trading 3.5% below the analyst's lowest target, with sentiment firming and business acceleration in the forecast.
Ambarella’s focus on low-power Edge AI computing is perfectly positioned to meet increasing demand. Low-power microchips and the software infrastructure to operate them are critical for the IoT, which relies heavily on remote devices and batteries.
The AI industry now focuses on creating and training AI, which relies on data centers and the chips to power them—powerful NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) accelerators. Ambarella will see increasing demand as AI advances and becomes embedded in devices and the IoT. Because legacy market inventory is normalizing and AI demand is accelerating, the company should pivot back to growth and profitability in FQ3 and see its business accelerate into 2025. Forecasts for long-term growth are rising, and revenue for 2026 is projected to hit a record.
Ambarella Has a Beat-and-Raise Quarter
Ambarella struggled in Q4 and 2023, but its efforts to help end markets correct inventory levels are paying off. The company’s $51.62 million in revenue is down 38% compared to last year but outpaced consensus by 50 basis points and was compounded by margin strength and guidance. The margin contracted slightly compared to the previous year. Still, it was less than expected, leaving the GAAP and adjusted losses better than forecast—the company’s $0.24 in adjusted losses beat by $0.09 or 2700 bps.
The balance sheet news is decent. The company’s receivables, inventory and working capital are down but offset by an increase in cash. The cash balance is sufficient to sustain operations until profitability resumes and debt remains controllable. The company is net cash, and long-term liabilities are less than 0.2X equity, providing no red flags.
Guidance for Q1 2024 is favorable and potentially cautious, given the rapid advance of AI. Ambarella forecasts Q1 revenue to fall compared to last year but for the contraction to narrow sharply and for sequential growth. This year, quarterly growth is expected sequentially at a low to mid-single-digit pace, with Q3 returning to YOY growth. Assuming a low single-digit sequential pace, Q3 should see revenue expand 13% to 15% YOY, and growth should accelerate into Q4.
Ambarella stock is Ready for a Reversal
Ambarella stock is ready to reverse and needs only a catalyst to spur the market into action. That may come with the next earnings report due in late May. Until then, the market may be capped at the top of its range near $64, where selling has been vigorous.
The next move to $64 may produce a similar selling response, but there is risk in that outlook. With analysts' support mounting and a pivot back to growth at hand, bearish traders may be rethinking their positions. Ambarella could move outside of its range ahead of the Q1 release in this scenario but would not be cleared for a sustained rally. Critical resistance is near $68, and the top of a price gap opened in 2023. A move above that level would be bullish and open the door to a sustained rally.
