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Down 57% in 2022, This High-Growth Tech Stock Is a Terrific Buy

Share prices of Ambarella (NASDAQ: AMBA) plunged 31% following the release of the company's fiscal 2022 fourth-quarter results on Feb. 28, as its guidance fell slightly behind Wall Street's expectations.

However, a closer look at Ambarella's quarterly results and guidance indicates that investors may have overreacted. The chipmaker, whose chips power internet security cameras and automotive cameras, is growing at an eye-popping pace and seems built for long-term growth. Let's see why the massive pullback in Ambarella stock, which is down 57% so far in 2022, could present a great opportunity to snag an investment at a steep discount.

Image source: Getty Images.

Ambarella delivers terrific growth once again

Ambarella's fiscal 2022 fourth-quarter revenue increased 45% year over year to $90.2 million. The company reported adjusted earnings of $0.45 per share for the quarter, which was more than three times the prior-year period's earnings of $0.14 per share. Wall Street expected Ambarella to earn $0.42 per share on $90.2 million in revenue, so the chipmaker easily cleared analysts' bottom-line expectations.

The company's full-year revenue came in at $332 million, an increase of 49% over fiscal 2021. Ambarella's adjusted earnings for fiscal 2022 jumped to $1.61 per share from $0.33 per share in the previous year. So, Ambarella ended fiscal 2022 on a high with terrific top- and bottom-line growth, but investors took issue with the company's guidance, which wasn't all that bad on taking a closer look.

Ambarella expects revenue in the current quarter to land between $88.5 million and $91.5 million, the midpoint of which is slightly behind consensus estimates of $90.9 million. The company has guided for an adjusted gross margin of 63% to 64% this quarter. The top-line guidance points toward 28% year-over-year growth, as Ambarella had generated $70.1 million in revenue in the first quarter of fiscal 2022, and the adjusted gross margin is set to increase over the prior-year period's figure of 62.9%.

So, even though Ambarella's guidance may not be up to the mark, it indicates that the company's high pace of growth is here to stay. More importantly, insights provided by Ambarella management on the latest earnings conference call suggest that the company is set for a solid fiscal year ahead.

Solid growth drivers make this chipmaker an enticing investment

As mentioned earlier, Ambarella gets most of its revenue by providing chips for two applications -- security cameras and automotive. The automotive business doubled in revenue last year and produced 25% of the company's top line. Ambarella anticipates its revenue from the automotive segment to account for 45% of the top line from the current fiscal year.

That's not surprising, as Ambarella is all set to step up its game in the automotive camera market this year. The company will launch its first 5-nanometer (nm) automotive system-on-a-chip (SoC) in the second half of the fiscal year, while its second 5nm chip is expected to start sampling later this year. The good part is that the company is already seeing interest from automotive OEMs (original equipment manufacturers) for these chips.

Investors should also note that Ambarella's automotive design win pipeline for the next five years stands at $1.8 billion. $700 million of this has already been secured by the company, and it is working to secure the rest. So, the automotive camera market is going to be a key growth driver for Ambarella in the long run, which isn't surprising as this space is expected to clock an annual growth rate of nearly 20% through 2028.

Coming to the internet security camera market, Ambarella sees its addressable market in this segment approaching $1.5 billion by fiscal 2028 as compared to just over $800 million last year. Ambarella estimates that the combined opportunity in the internet security and automotive camera markets could propel its annual revenue to $1 billion by fiscal 2028. If that's indeed the case, Ambarella's revenue would increase at a compound annual growth rate (CAGR) of 20% for the next six years.

The company also expects its non-GAAP operating margin to exceed 30% in case its annual revenue hits $1 billion in the coming years, which would be a big improvement over the 19% operating margin it reported last year. As such, it is not surprising to see why analysts expect Ambarella's earnings to clock a CAGR of 86% for the next five years.

Time to buy

The discussion above indicates that Ambarella could turn out to be a top growth stock in the long run. That's why investors looking to buy a fast-growing company at a relatively cheaper valuation should take a closer look at Ambarella, as it is trading at 9.6 times sales right now, lower than 2021's average sales multiple of 24.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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