Not surprisingly, the stock has fallen dramatically out of favor. Once a darling among investors, thanks to its astounding 1,600% surge higher from its IPO price, sentiment on the stock tanked over time as the company struggled to right the ship. However, there is a silver lining within the demise, and that is this: AMBA is no longer facing such arduous expectations from investors and the analyst community, like it did back when it was in the earlier stages of its growth curve.
Which brings us to today's surge higher in the stock, following what is another lackluster quarter and guide. Specifically, after the close last night, AMBA reported Q3 EPS of $0.21, beating the $0.09 consensus, but revenue collapsed again, this time falling by a whopping 36% year/year to $57.3 mln -- virtually in-line with expectations. Furthermore, AMBA issued down-beat outlook for Q4, seeing revenue of $51.0 mln, plus or minus 3%, which equates to a range of $49.5-$52.5 mln, compared to the $55.6 mln consensus.
Gross margin also continued to be pressured, dropping to 60.9% from 64.0% in the year ago quarter. This is mainly related to the ongoing erosion of consumer product-related sales (sports cameras, wearables, drones, etc.), which carry higher margins than those of surveillance cameras, which form a higher-growth market, particularly in China.
With the sharp decline in revenue and the softer margins, AMBA swung to an operating loss of ($9.4) mln from operating income of $15.1 mln in 3Q17. So, as far as Q3 goes, there aren't many positives investors can point to, which begs the question: "Why is the stock trading higher by 17% today?"
We believe there are two primary reasons. First, as we discussed above, expectations and sentiment were both rock bottom heading into the print last night. On that note, there is also plenty of short interest in the stock. While keeping that in mind, during the conference call last night, management was pretty bullish about its opportunities in computer vision (CV) related products, particularly in the surveillance camera and auto markets. Therefore, we have a situation in which investors are sensing a bottoming out in both the business and the stock, combined with some short covering.
On the topic of CV products, AMBA stated that its CV22 and CVFlow system-on-chip solutions have either one design win or are under evaluation at each of the top ten professional security camera providers. Furthermore, it is now expecting to make its first production volume shipment by the end of Q4 this year, with customer product launches by the middle of 2019.
Since consumer-related products now only account for less than 15% of its total revenue, it will be easier for AMBA to move the needle with its new CV products. Additionally, CV products carry significantly higher average selling prices than the company’s other chips, so the continual slide in margins may also soon be coming to an end.
All that said, AMBA still faces some challenges. The company does a significant amount of business in China. The tariffs imposed against the country, as well as certain export restrictions, could have a negative impact. In fact, the company noted last night that light vehicle production in China was slower than expected, which hurt its auto camera segment. And due to the U.S. ban on the purchase of surveillance cameras for government facilities from Hikvision and Dahua, it has seen some near-term reduction in their orders.
To conclude, while there is certainly a lot of hope and promise for its CV products, AMBA is not quite out of the woods just yet. Today's reaction higher is likely related to those hopes, but it is also simply a "buy the news" reaction, as the stock had already cratered ahead of the quarterly results. For now, AMBA remains mostly a "wait and see" type of story.