Why Ambarella Stock Dropped Like a Rock Today

What happened

Semiconductor products from Ambarella (AMBA -18.49%) are used in Internet-of-Things (IoT) devices and cars, among other things. But right now, consumer demand is generally weak, and companies are trying to clean out old inventory, meaning they need fewer products from Ambarella to build new inventory.

On Aug. 29, Ambarella reported financial results for its fiscal second quarter of 2024, and that’s the gist of how the quarter went. Revenue fell 23% year over year to $62.1 million as its customers reduced inventory. And lower demand resulted in steeper losses for the company. It reported a net loss of $31.2 million in Q2, down from a net loss of $23.7 million in the prior-year quarter.

Lackluster financial results and uninspiring commentary from management explain why Ambarella stock was down 19% as of noon ET.

So what

It’s possible that investors’ Q2 expectations for Ambarella were far too high. The hottest trend on the market right now is artificial intelligence (AI). And some investors see Ambarella stock as a way to invest in the trend. After all, in the conference call to discuss Q2 results, management mentioned AI 30 times in its prepared remarks.

Therefore, investors may have expected outsize Q2 growth, which is why the 23% drop in revenue was so unsettling.

Now what

What’s more, AI apparently won’t catalyze Ambarella’s results to the upside anytime soon. Management says it expects its customers to keep reducing their inventories for the remainder of this year. Therefore, the company hopes to return to growth next year.

Of course, any growth next year for Ambarella would be relative to its weak performance this year. Given the company’s ongoing losses and the uncertainty about when its business could stabilize, this might be a good stock to watch from the sidelines.

Jon Quast 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.

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