Leveraging Edge AI Processing With DeepSeek-R1 Will Unlock New Applications

Key Takeaways

• Ambarella's focus on edge AI, innovative SoCs, and automotive market expansion is driving potential revenue and earnings growth.
  
• Commitment to advanced technologies and efficiency improvements positions Ambarella for margin expansion and future growth.
  
• Heavy reliance on a single logistics provider and high operational expenses pose risks to profitability, while market uncertainties challenge revenue and margin growth.

Catalysts

Develops semiconductor solutions that enable high-definition (HD) and ultra HD compression, image signal processing, and artificial intelligence processing worldwide.

• Ambarella's strategic focus on edge AI processing with more advanced reasoning models, such as DeepSeek-R1, is driving an increase in average selling prices (ASP) and presents opportunities to leverage AI at the edge for new applications. This is likely to positively impact revenue growth.
  
• The introduction of the N1-655 edge GenAI SoC and other AI processing solutions at CES demonstrates Ambarella's capability to support cutting-edge AI models with lower power requirements. This innovation is expected to enhance market adoption, leading to potentially higher earnings.
  
• Successful commercialization of new SoC product families, such as CV5 and CV7, is anticipated to contribute significantly to revenue, with these families expected to account for more than half of the incremental revenue in fiscal 2026.
  
• Ambarella's active engagement in the automotive market, especially in ADAS and other in-cabin systems, positions it for growth in automotive revenue, which should support overall company earnings despite geopolitical risks.
  
• The company's roadmap includes the development of 2-nanometer technology for next-generation edge AI processors, reflecting a commitment to sustained innovation, efficiency improvements, and operating leverage, eventually supporting margin expansion and earnings growth.

Ambarella Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ambarella's revenue will grow by 17.6% annually over the next 3 years.
• Analysts are not forecasting that Ambarella will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ambarella's profit margin will increase from -41.1% to the average US Semiconductor industry of 14.5% in 3 years.
• If Ambarella's profit margin were to converge on the industry average, you could expect earnings to reach $67.3 million (and earnings per share of $1.43) by about April 2028, up from $-117.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 78.6x on those 2028 earnings, up from -15.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 3.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.86%, as per the Simply Wall St company report.

Ambarella Future Earnings Per Share Growth

Risks

• Ambarella’s reliance on a single logistics provider, WT Microelectronics, which represents a significant portion of their revenue, poses a risk that could impact revenue if logistical challenges arise or if the provider's strategy changes.
  
• Uncertainties related to government policy decisions and potential tariffs affecting customer supply chains may lead customers to reduce orders, impacting revenue growth projections and market expansions.
  
• The competitive nature of ADAS markets, and the need for cost-effective solutions, can pressure pricing and margins, impacting Ambarella's revenue and profitability as they try to compete with incumbents and varying customer demands.
  
• Increasing operational expenses, particularly new product development costs and employee-related expenses, could strain net margins despite revenue growth, affecting overall profitability if not managed effectively.
  
• High inventory levels in certain markets, specifically automotive, and the slow reduction of these inventories, combined with cautious customer purchasing behavior due to geopolitical risks, could suppress earnings and revenue growth.

Valuation

• The analysts have a consensus price target of $87.273 for Ambarella based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $463.5 million, earnings will come to $67.3 million, and it would be trading on a PE ratio of 78.6x, assuming you use a discount rate of 8.9%.
• Given the current share price of $43.6, the analyst price target of $87.27 is 50.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.