Why Ambarella Stock Just Crashed

AMBA -18.78%

Key Points

• Ambarella beat on sales and beat on earnings last night.

• The image-processing chips-maker is reporting surging revenue from AI.

• 10 stocks we like better than Ambarella ›

Ambarella (NASDAQ: AMBA) stock tumbled 14.4% through 10 a.m. ET Wednesday morning despite beating easily on earnings last night.

Analysts forecast the maker of image-processing semiconductor chips would earn $0.21 per share on quarterly sales of $104.1 million; Ambarella actually reported a $0.27 per share profit and sales of $106.5 million.

Ambarella Q3 earnings

This was fiscal Q3 2026 for Ambarella, and CEO Fermi Wang says it was a good one, with "record quarterly revenue, above the high-end of our third quarter guidance," and "edge AI revenue setting its sixth consecutive revenue record." (Yes, you heard that right. Ambarella says it's an AI stock now).

Quarterly revenue surged 31%. Unfortunately, gross revenue declined one whole percentage point, to 59.6%. Despite the pro forma "profit" noted above, when calculated according to generally accepted accounting principles (GAAP), Ambarella lost money. Net losses came to $0.35 per share.

Still, this was better than last year's $0.58 per share GAAP loss.

Is Ambarella stock a sell?

So why are investors upset about an earnings miss?

Guidance doesn't seem to be the problem. The CEO says he's "excited about the opportunity ahead of us" as Ambarella incorporates more AI into its chips, and forecasts Q4 revenue between $97 million and $103 million -- well ahead of Wall Street's expected $95.6 million.

Still, a loss is a loss, and Ambarella stock isn't really priced for losses. The company generated $42.9 million in positive free cash flow year-to-date, putting it on track to reach approximately $57 million by year-end. Weighed against a $3.3 billion market capitalization, that works out to a price-to-free cash flow ratio of nearly 58.

Even with 31% sales growth, that seems kind of rich, and Ambarella stock remains a sell.

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Rich Smith 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.

Why Ambarella Stock Just Crashed was originally published by The Motley Fool