Edge AI Adoption And SPOT Licensing Are Expected To Drive Long-Term Upside

Catalysts

About Ambiq Micro

Ambiq Micro designs ultra low power semiconductor solutions that enable AI processing directly on battery powered edge devices.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of AI in wearables, medical devices and industrial sensors is increasing demand for ultra low power edge compute. This is positioning Apollo and future Atomic products to drive higher unit volumes and average selling prices, which should lift revenue growth.
• Expanding beyond Mainland China into diversified global customers reduces geopolitical and tariff risk while improving pricing power and product mix quality. This supports more durable revenue and structurally higher gross margins.
• A pipeline of higher performance Apollo SoCs and the upcoming Atomic family, tailored for vision and other compute intensive workloads, enables Ambiq to move up the value stack within existing customers and win new edge AI designs. This can expand gross profit dollars and accelerate earnings leverage as R&D scales.
• The emergence of data center, automotive and mobile use cases seeking lower power architectures opens a licensing opportunity for the SPOT platform. This can create an additional high margin royalty and IP revenue stream that could improve net margins over the medium term.
• A growing ecosystem of health oriented wearables, AR and worker safety solutions, combined with Ambiq's software tools that shorten customer design cycles, should increase design win velocity and content per device. This supports sustained revenue growth and operating expense efficiency that narrows net losses over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ambiq Micro's revenue will grow by 28.2% annually over the next 3 years.
• Analysts are not forecasting that Ambiq Micro will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ambiq Micro's profit margin will increase from -49.9% to the average US Semiconductor industry of 14.7% in 3 years.
• If Ambiq Micro's profit margin were to converge on the industry average, you could expect earnings to reach $22.3 million (and earnings per share of $1.0) by about December 2028, up from $-36.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 52.4x on those 2028 earnings, up from -15.4x today. This future PE is greater than the current PE for the US Semiconductor industry at 38.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.4%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Edge AI adoption may grow more slowly than expected across wearables, medical and industrial devices, which could limit unit volumes for Apollo and delay meaningful contribution from upcoming Atomic products. This would constrain revenue growth and delay operating leverage in earnings and net margins.
• Ambiq remains loss making despite gross margin improvements and plans to keep scaling R&D and go to market spending. If new design wins and product ramps do not materialize at the needed pace, elevated operating expenses could prolong substantial net losses and pressure cash flows and earnings.
• The sharp reduction of revenue exposure to Mainland China while new geographies and applications are still ramping creates transition risk. If non China demand softens or key customers reduce orders, this strategic shift could lead to stagnant or declining revenue and underutilized gross margin.
• The SPOT IP licensing strategy targets long dated opportunities in data centers, automotive and mobile. Any delays in proving the 12 nanometer platform or closing licensing deals would push out this high margin royalty stream, limiting upside to future net margins and earnings.
• Ambiq is dependent on a concentrated set of leading wearable and edge customers. If any of these end markets face saturation, competitive displacements or pricing pressure, Ambiq could see weaker average selling prices and lower order visibility, which would negatively impact revenue, gross margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $38.75 for Ambiq Micro 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 $48.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $152.0 million, earnings will come to $22.3 million, and it would be trading on a PE ratio of 52.4x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $30.16, the analyst price target of $38.75 is 22.2% 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.