2 Trends That Dominate The Ambarella Story

Video processing chipmaker Ambarella Inc AMBA reported Thursday better-than-expected fiscal third quarter results. Reviewing the results, Morgan Stanley delved into two trends it identified in the Ambarella story.

The Analyst

Morgan Stanley analyst Joseph Moore maintained his Overweight rating and $60 price target.

The Thesis

Ambarella's first trend is the substantial headwinds facing the company's core business, stemming from the loss of GoPro Inc GPRO business, a steep decline in drone volumes and tactical issues with memory supply impacting surveillance.

The second trend is the embryonic computer vision chip that promises breakthrough capabilities in what has become one of the most important markets among all semis, Moore said.

According to the analyst, the focus should be on computer vision, which is nothing but processing video images to extract information.

The company said it already sampled the first version of computer vision chip to automotive and surveillance customers, with performance meeting its goals, Moore noted. Ambarella said it's likely to announce automotive development relationships for computer vision in the calendar year 2018, and it's also looking at an accelerated migration of computer vision to 10 nm, the analyst added.

"We think that the early January consumer electronics show will be a meaningful positive catalyst for the stock, and there are other important catalysts to keep in mind for the computer vision business," Moore said.

Morgan Stanley sees a path to turning around the company's core business, as OEM autos pick up the slack from the consumer markets.

"In our view our $115 bull case, which requires the company to generate meaningful development traction with tier one automotive customers in computer vision, is still very possible," the firm said.

Price Action

At time of writing, Ambarella shares were soaring 17 percent to $63.53. For the year-to-period, the stock has gained about 18 percent.

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