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Shares of Ambarella (NASDAQ: AMBA) have stumbled nearly 20% this year, woefully underperforming the Philadelphia Semiconductor Index's 5% gain. The image processing SoC (system on chip) maker's decline can be attributed to the loss of top customers, rising competition from bigger chipmakers, and its lofty P/E of 46 -- which is much higher than the industry average of 25 for semiconductor equipment makers.
Nonetheless, bottom fishing investors might still consider Ambarella to be a potential turnaround play in the frothy semiconductor market. However, I wouldn't touch Ambarella for one simple reason: the competitive headwinds are too fierce to counter.
Image source: Ambarella.
Why is Ambarella losing ground to its competitors?
Several years ago, Ambarella established itself as the "best in breed" maker of image processing SoCs. Larger chipmakers weren't focused on this niche market, so Ambarella became the preferred supplier for companies like GoPro (NASDAQ: GPRO), DJI Innovations, and Hikvision -- which are respectively the top makers of action cameras, drones, and security cameras in the world.
Unfortunately, larger chipmakers eventually noticed Ambarella's growth. Qualcomm (NASDAQ: QCOM), the top mobile chipmaker in the world, launched new variants of its Snapdragon SoC -- which included its integrated Spectra image processor and 4G baseband modem -- for action cameras, drones, and other devices.
Ambarella's SoCs don't have built-in modems, so an OEM would need to buy a baseband modem separately (likely from Qualcomm) to add stand-alone 4G connectivity.
DJI's Spark drone. Image source: DJI.
Intel (NASDAQ: INTC) also took aim at Ambarella with its acquisition of computer vision chipmaker Movidius in late 2016. DJI already uses Movidius' Myriad 2 in its portable Spark drone (which doesn't use an Ambarella SoC), and is expected to use the newer Myriad X chip in newer drones.
DJI's flagship Phantom 4 drones previously used the Myriad 2 alongside an Ambarella SoC, but its newer portable drones cut Ambarella out of the loop by using the Myriad 2 for both computer vision and image processing tasks. Hikvision also uses the Myriad 2 in its newer AI-powered cameras, and Alphabet's Google uses the chipset in its new wearable Clips camera.
A slow response to obvious threats
Ambarella's response to the Myriad and similar all-in-one computer vision chips has been painfully slow. Its first computer vision chips -- the CV1 and CV22 -- have been in development for over four years, and were only recently revealed at CES in January.