Shares of Ambarella (NASDAQ: AMBA) jumped 14% on Friday after the chipmaker reported third-quarter earnings that topped analysts' estimates. Revenue fell 11% year over year to $89 million, which beat expectations by $130,000. Non-GAAP net income fell 33% to $25.7 million, or $0.75 per share, which still topped estimates by $0.08 per share.

The key facts

Ambarella produces image-processing chips for action cameras, security cameras, dash cams, drones, and other devices. Its core business has been losing momentum over the past two years due to two major headwinds.

First, sales of action cameras by its top customer, GoPro (NASDAQ: GPRO), peaked. Second, competitors started challenging Ambarella with new components. Qualcomm (NASDAQ: QCOM) introduced mobile chipsets with integrated image processors and 4G modems. Intel's (NASDAQ: INTC) Movidius computer vision chips started replacing Ambarella's image processing chips in various drones and connected cameras. Chinese chipmakers started winning customers among security camera makers.

That's why Ambarella's non-GAAP gross margin fell 230 basis points annually to 64% during the quarter. To catch up with its rivals, Ambarella spent more money -- which caused its operating expenses to rise 13% annually. Analysts expect Ambarella's revenue and earnings to fall 5% and 33% respectively this year.

The road ahead

Ambarella expects its CV1 computer vision chip, which will be introduced at CES in January, to widen its moat against Intel next year. There are also persistent rumors that Intel might make a bid to buy Ambarella, which would complement its acquisitions of Movidius and crash-avoidance-system maker Mobileye.

These catalysts might boost Ambarella's stock price over the next few quarters, but the chipmaker remains in a fairly weak position against its bigger rivals, so investors shouldn't get too excited about its post-earnings rally.

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The author(s) may have a position in any stocks mentioned.

 

Leo Sun has no position in any of the stocks mentioned.

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