Ambarella (NASDAQ:$AMBA) has undeniably faced a tough year; the company’s stock plunged a 40% over year past 12 months, and it’s now hovering near a 52-week low. Despite those gloomy statistics, investors are looking at the company’s top and bottom line growth with some optimism.

Ambarella actually reported a positive year-over-year revenue growth over the past four quarters while beating analyst estimates on the top and bottom lines. Looking ahead, analysts expect Ambarella revenue and non-GAAP earnings to fall relatively, 5% for the former and 35% for the latter. Those numbers are dismal for a stock that trades at 24 times earnings, which is higher than the industry average P/E of 23 for semiconductors.

Now, let’s examine whether investors have been too hard on Ambarella.

The Business

Ambarella manufactures imagine processing system-on-ships (SoCs) for cameras. Some of their partners include action camera giant GoPro (NASDAQ:$GPRO), drone giant DJI Innovations, and security camera giant Hikvision. We emphasis on the word giant because those companies are all leading innovators within their respective unique products.

Essentially, when GoPro’s sales declined this past year, so did Ambarella’s. For the upcoming year, Ambarella’s GoPro venue is expected to face a substantial decline- either due to lower camera sales or GoPro’s long-rumoured shift toward rival suppliers like Qualcomm (NASDAQ:$QCOM).

The Margins

Yes, Ambarella’s margins are decreasing. Between the second quarters of fiscal 2017 and 2018, non-GAAP gross margins dropped from 67.1% to 63%. Ambarella attributed the loss to the expansion of its lower-margin security camera SoC market in China, which faces tough domestic competition from Chinese chip makers.

Ambarella’s total operating expenses also increased by 15%. 

The Turnaround Plan

Ambarella’s main priority going forward is to sustain investment in R&D to retain its reputation as the “best in breed” provider of image processing SoCs. The company will seek to strike deals with other drone makers to reduce its dependence on DJI, and partnerships with automakers to provide SoCs for integrated dash cams.

The Verdict

If Ambarella plans to achieve a real turnaround, it must stop relying heavily on a few major customers that have questionable loyalties and inconsistent production scales. Further, the company’s fundamentally flawed business model is not helping. For now, investors should hold off on such a risky stock.

Featured Image: twitter