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Time to Buy This Beaten-Down AI Tech Stock?

This has been a brutal earnings season for investors who hold a lot of growth stocks. Markets are down, and Wall Street sentiment is shifting toward safer, more established businesses. Many of these growth stocks are issuing conservative outlooks for the fiscal year ahead, too, after several years of booming gains.

It was still jarring to see Ambarella (NASDAQ: AMBA) shares fall over 30% after the company reported solid fourth-quarter results. The company, which develops AI video processing tech in the autonomous driving and security markets, has some big markets it can target over the next few years.

That's true even though the first half of 2022 will likely show slower growth and rising earnings. But should investors be excited about the stock now that it is down over 50% so far this year?

Let's take a look.

It was a great year

Ambarella closed out a great fiscal year with solid Q4 results. Revenue was up 49% in 2021, and profitability expanded. Both of these factors were driven by the company's transition into computer vision tech and away from less demanding chip platforms that power things like sports cameras.

This AI-focused segment tripled as a percentage of total revenue, thanks to high demand in the security camera and autonomous driving spaces. It now accounts for 25% of sales. The shift toward more premium tech is also boosting Ambarella's profitability, just as management had predicted.

Gross profit margin improved to 63% of sales last year from 61% a year ago. "Fiscal 2022 was an inflection year," CEO Fermi Wang said in a press release.

Cloudy outlook

Instead, investors chose to focus entirely on the short-term challenges that are pressuring the business in early 2022. Semiconductor shortages are pinching several of Ambarella's customers and producing order delays.

Image source: Getty Images.

Purchasing trends typically slow in Q1 as well, and that deceleration might be amplified by a factory shutdown in March, management said in a conference call. Overall, revenue gains should slow to about 29% in Q1 compared to this past quarter's 45% spike. Growth will look weaker for the wider year, and most Wall Street pros are forecasting 18% higher sales in that time.

That's no reason to abandon Ambarella. Management still sees several attractive growth avenues around AI-powered video processing, which should account for roughly half of all sales this year. Margins will rise with that shift, just as they did in 2021.

Time to buy?

Yes, this stock carries a lot of risk since Ambarella's engineers have to stay ahead of tech hardware shifts. There's no guarantee that its customers will find enough value in its next-generation platforms, and the wider industry might slow down in 2022.

But those risks were all present before Ambarella announced its earnings, and investors sent the stock down a further 30%. Shares could decline more, especially if Wall Street's preferences continue moving away from unprofitable growth-focused tech businesses.

However, Ambarella hasn't given shareholders any new reasons to doubt its long-term outlook, which involves an expanding roster of tech manufacturers, rising margins, and a steady move toward profitability, perhaps as early as 2023. If you don't mind some volatility while you watch that scenario play out, you might consider a small investment in Ambarella.

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Demitri Kalogeropoulos 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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