Ambarella's Q3 Growth Confirms Edge AI Momentum, But Profitability Risks Loom

What happened

Ambarella reported record Q3 FY26 revenue of $108.5 million, up 31.2% year-over-year, driven by strong demand for edge AI in cameras and vehicles. The company raised its full-year growth guidance to 36-38%, with new products like the CV7 SoC enhancing its competitive position in low-power AI applications. However, the DeepValue report notes that non-GAAP gross margins have slipped to around 60%, and Q4 guidance implies a seasonal decline with margins at 59-60.5%, signaling persistent pressure from competition and mix shifts. Market sentiment is crowded, with narratives shifting from pure growth to concerns over GAAP losses and margin stability, as Ambarella remains unprofitable on a GAAP basis despite positive free cash flow. Overall, while revenue growth accelerates, the valuation near $65 already embeds high expectations, leaving little room for error amid risks like design-win conversions and intensifying competition.

Implication

Ambarella's strong Q3 results validate the edge AI growth story but do not mitigate the core risks highlighted in the DeepValue report, such as margin compression and GAAP losses. Current pricing assumes mid-30s revenue growth and stable margins, offering limited upside without evidence of expanding profitability or automotive ramp-ups. The 'WAIT' rating suggests more attractive entry points around $55, where the strong balance sheet provides better downside protection. Key near-term catalysts include FY27 guidance and gross margin trends, which will test whether growth can translate into sustainable earnings. Until Ambarella demonstrates it can defend margins and achieve GAAP profitability, the risk-reward favors caution over aggressive investment.

Thesis delta

The new article confirms Ambarella's revenue acceleration and edge AI adoption, aligning with the base case of 22-28% annual growth in the DeepValue report. However, it does not address the critical issues of margin erosion, GAAP losses, or competitive pressures, so the overall thesis remains unchanged with a 'WAIT' rating. Investors should still seek clearer evidence from FY27 outlook or a pullback to lower prices before considering increased exposure.