Geopolitical Strain And Chip Rivalry Will Undermine Future Value

Key Takeaways

• Geopolitical risks and industry shifts threaten supply chain stability, cost structure, and market position, leading to heightened unpredictability in revenues and margins.
  
• Growing competition and customer self-sufficiency undermine pricing power and profitability, while reliance on core markets and R&D spending heighten financial vulnerability.
  
• Ambarella's focus on advanced edge AI and diversified product innovation positions it for sustained growth, margin improvement, and resilience amid expanding long-term market opportunities.

Catalysts

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

• Geopolitical tensions and intensifying global protectionism pose a structural threat to Ambarella's supply chain stability and cost base, potentially resulting in unpredictable tariffs, regulatory restrictions, or forced shifts in manufacturing location that could significantly increase operational costs and undercut earnings growth over the coming years.
  
• The accelerating move by major technology companies and automakers toward designing their own custom silicon chips for AI and imaging tasks is eroding Ambarella's long-term competitive edge, increasing the risk of permanent market share loss and stagnating top-line growth as the industry consolidates around vertically integrated players.
  
• The company's heavy dependence on a few core markets-automotive and security cameras-exposes it to sector-specific downturns, heightened regulatory scrutiny (notably around data privacy and surveillance), and shifting customer procurement, all of which could lead to unpredictable swings in revenue, greater earnings volatility, and margin compression over the next decade.
  
• Intensified chip commoditization and expanding competition from larger, better-resourced rivals such as NVIDIA and Qualcomm are expected to exert sustained pricing pressure, driving industrywide gross margins lower and making it increasingly difficult for Ambarella to translate innovation into durable profitability.
  
• Unrelenting R&D and new product development spending, required to keep pace with rapidly evolving AI models and edge infrastructure needs, is likely to outpace revenue if end market adoption slows or falls short of projections, fundamentally limiting the company's ability to achieve operating leverage and resulting in a persistent drag on net margins and free cash flow.

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 12.3% 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 -32.7% to the average US Semiconductor industry of 14.4% in 3 years.
• If Ambarella's profit margin were to converge on the industry average, you could expect earnings to reach $64.5 million (and earnings per share of $1.4) by about August 2028, up from $-103.5 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 47.6x on those 2028 earnings, up from -26.4x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 2.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.11%, as per the Simply Wall St company report.

Ambarella Future Earnings Per Share Growth

Risks

• Ambarella is demonstrating strong secular growth in edge AI markets, with edge AI products accounting for over 75% of revenue and four consecutive quarters of record AI revenue, which suggests a sustainable upward trend in both revenues and earnings.
  
• The company is successfully transitioning to higher-value products, as seen with the adoption of 5-nanometer CV5, CV7, and 10-nanometer CV2 families driving higher average selling prices, supporting an increase in gross margins and long-term profitability.
  
• Significant customer wins and product launches across automotive, IoT, industrial automation, and enterprise video conferencing indicate robust diversification and expanding addressable market, potentially providing stable and growing revenue streams.
  
• Ambarella is taking advantage of long-term secular trends like the proliferation of intelligent video analytics, expansion of advanced driver assistance systems, and growth in demand for AI-powered edge infrastructure, all pointing to positive market tailwinds that could drive long-term revenue and margin expansion.
  
• The company remains highly committed to R&D and rapid innovation, evidenced by continued investment in advanced AI accelerators, a robust product pipeline, and positive free cash flow for 16 consecutive years, suggesting the ability to sustain differentiated offerings and defend market share, supporting stable or growing net margins and future earnings.

Valuation

• The assumed bearish price target for Ambarella is $50.02, which represents two standard deviations below the consensus price target of $77.72. 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 $95.0, 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 $447.7 million, earnings will come to $64.5 million, and it would be trading on a PE ratio of 47.6x, assuming you use a discount rate of 10.1%.
• Given the current share price of $64.55, the bearish analyst price target of $50.02 is 29.0% 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.