Edge AI Competition And Cyclical Downturns Will Erode Margins

Key Takeaways

• Heavy reliance on volatile consumer-facing edge AI markets and single-region supply chains heightens Ambarella's exposure to cyclical downturns and geopolitical risks.
  
• Intensifying competition and persistent R&D expenses threaten pricing power, margin stability, and undermine profitability if anticipated automotive growth fails to materialize.
  
• Expanding edge AI applications, strong product positioning, higher margins, and focus on advanced software position Ambarella for sustained growth in expanding AI and IoT markets.

Catalysts

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

• The emergence of edge AI in new markets like portable video, robotics, and edge infrastructure is driving current strong revenue growth, but this expansion relies heavily on consumer-oriented applications with higher seasonality and volatility, exposing Ambarella's long-term top-line to cyclical downturns and lower visibility compared to more stable enterprise or automotive segments.
  
• While Ambarella is currently benefiting from elevated average selling prices and unit growth, the increasingly competitive environment-especially with the commoditization of AI SoCs and aggressive pricing from large rivals and low-cost competitors-threatens to erode future pricing power and compress gross margins, particularly as new entrants accelerate integration of AI directly into sensors and end devices.
  
• The future growth trajectory of Ambarella in its largest projected verticals, such as automotive ADAS and autonomy, remains highly uncertain due to repeated delays in major OEM design wins, a prolonged focus by automakers on lower-end L2+ systems, and government-driven regulatory shifts toward safety and lower feature complexity, creating risk of stalled automotive revenue and underutilized R&D investments.
  
• Despite expanding their software ecosystem and development platforms, sustained high research and development spending is necessary to keep up with rapid advances in AI and semiconductor process technologies; if future sales do not scale proportionally, net margins and long-term profitability are likely to deteriorate due to rising operating expenses, particularly as capital intensity increases with migration toward advanced nodes.
  
• Ambarella's heavy revenue concentration with a single fulfillment partner in Asia and significant exposure to export markets raise vulnerability to global trade frictions, sanctions, and protectionist policies, putting long-term revenue streams at risk and potentially forcing costlier supply chain shifts that would pressure both operating margins and overall earnings consistency.

Ambarella Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ambarella compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ambarella's revenue will grow by 12.1% annually over the next 3 years.
• The bearish 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 -25.5% to the average US Semiconductor industry of 14.1% in 3 years.
• If Ambarella's profit margin were to converge on the industry average, you could expect earnings to reach $69.2 million (and earnings per share of $1.5) by about September 2028, up from $-88.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 51.4x on those 2028 earnings, up from -38.0x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 3.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.06%, as per the Simply Wall St company report.

Ambarella Future Earnings Per Share Growth

Risks

• Rapid expansion of edge AI applications beyond traditional markets, including portable video, robotics, aerial drones, and edge infrastructure, is materially broadening Ambarella's addressable market, which supports higher revenue growth and could drive earnings higher in the long term.
  
• Successful design wins in new high-growth segments such as autonomous drones and edge AI infrastructure, alongside robust adoption in security, automotive, and portable video, indicate strong product positioning and customer diversification, which can help sustain and grow revenue.
  
• Increasing average selling prices for new generations of 5-nanometer AI SoCs, combined with expectations of unit growth, suggest margin expansion and gross profit growth over time, positively impacting profitability.
  
• Continued R&D investment in advanced AI and transition to more software-rich, unified hardware platforms is positioning the company to capture higher-margin, recurring software revenue, enhancing long-term net margins.
  
• Trends in energy efficiency and the proliferation of connected autonomous systems directly align with Ambarella's technological strengths, increasing the likelihood that its products remain in high demand as the secular edge AI and IoT markets continue expanding, which could result in sustained top-line and bottom-line growth.

Valuation

• The assumed bearish price target for Ambarella is $57.94, which represents two standard deviations below the consensus price target of $90.05. This valuation is based on what can be assumed as the expectations of Ambarella's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $49.6.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $490.0 million, earnings will come to $69.2 million, and it would be trading on a PE ratio of 51.4x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $79.32, the bearish analyst price target of $57.94 is 36.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.