AI is big business, and Ambarella (NASDAQ: AMBA) will benefit from it over the next decade, probably longer. While attention has been fixed on infrastructure names like NVIDIA (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), and Oracle (NYSE: ORCL), the time has come to pay attention to the next wave of winners, of which Amberalla is a key player. Now that AI infrastructure build-out is underway and AI models are being trained, the focus is turning to inference, which, for many industries, means optical input gathering, which is Ambarella’s strength. 

What this means for Ambarella is accelerating demand for its edge AI semiconductor products, software, and applications. Ambarella shifted to edge AI over the last few years and is now a leader in computer vision, as seen in demand for its cutting-edge products. Because its model echoes that of NVIDIA, in which the company invested in a full stack of products for key markets like autonomous driving and IoT early in the game, its sales growth and leverage will likely be similar. 

Ambarella Turned a Corner in the First Half

Ambarella’s FQ2 results show that it has turned a corner. The company not only beat on the top and bottom line but also returned to growth sooner than expected and is guiding for acceleration. The strength was driven primarily by demand for IoT products, but both automotive and IoT are up compared to last year. 

The critical detail is that demand for its newer CV3-AD, CV5, and CV7 products led to a product mix shift, positively impacting results. The takeaway is that leverage is building due to what CEO Fermi Wang described as “company-specific” factors that offset broader economic headwinds. Ambarella is positioned for leveraged growth when the broader economic headwinds ease, expected over the next twelve months as the FOMC lowers interest rates. 

The product mix also aided the bottom line. The company reported a slight contraction in gross margin but less than expected, reducing the adjusted loss more than anticipated despite increased R&D spending. Increased R&D is not a concern due to the apparent return, and it is offset by decreased SG&A and improved operating cash flow. 

Ambarella Guides for Accelerating Sales; Guidance is Cautious

Ambarella’s guidance is why the market spiked following the Q2 release. The company forecasted accelerating growth in Q3, with the Q3 and full-year outlook well above expectations. The eye-catching details are the 24% sequential gain and 56% YOY gain, which are likely cautious because the ramp in AI-edge inference investment has only just begun. 

Ambarella has risks, but the balance sheet is not one of them. The company produced a cash-flow negative quarter primarily because of R&D and acquisition-related costs. Still, it is robust financially and can continue its growth strategy. Balance sheet highlights include stable cash, assets, and liability compared to last year, leaving leverage at an ultra-low 0.2X of equity and 0.66X cash and equivalents. 

Ambarella Analysts Sentiment Becomes a Tailwind

The analysts' sentiment in Ambarella stock has been firm at Moderate Buy for over a year, but the price target trended lower in the first half of 2024. That trend shifted a few weeks before the Q2 release, and the shift has been confirmed in its wake. The first revisions on Marketbeat’s tracking page are reaffirmed ratings, including a  Buy with a price target of $90 from Needham. The $90 target is the highest issued by Wall Street analysts, $20 above the consensus target of $70 and up 70% compared to the pre-release closing price. 

The market surged 20% on the news, confirming support for this stock at a critical level. There may be volatility in calendar Q3 and Q4, but the trend appears to have reversed, and a new multi-year high will likely be set before the year’s end. The critical resistance point is near $65.