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Nvidia stock has been one of the biggest winners of the artificial intelligence (AI) revolution over the past two years, posting notable gains of around 800% over the past two years due to high demand for its mid-tier graphics cards. However, the last three months have been difficult for the chipmaker.
Shares of the semiconductor giant are down 1% over the past three months. This is a bit unexpected given that Nvidia posted exceptional effects in this period, exceeding Wall Street expectations. Additionally, Nvidia’s forecast was also higher than analysts expected.
However, concerns about Nvidia’s ability to sustain its outstanding growth, its valuation, and the short-term margin pressure that will be created by the ramp-up of its latest generation of Blackwell processors seem to be weighing on the company’s stock price. Meanwhile, two other little-known chip companies have received a big boost in the past three months thanks to the positive impact of AI on their businesses: Ambarella (AMBA 0.39%) and Lumentum Holdings (LITE 3.31%).
While Ambarella stock has jumped 25% in the past three months, Lumentum has appreciated nearly 23%. Their gains have been better than what Nvidia has delivered during this period, and the good part is that the AI-focused growth drivers of both of the smaller chipmakers are just kicking in.
Let’s check out how AI is turning out to be a catalyst for Ambarella and Lumentum.
The chips that Ambarella designs are deployed in automotive and Internet of Things (IoT) applications. The company is primarily known for its computer vision chips that process images and video, and it is now finding applications in the field of AI as well. According to one estimate, the size of the AI computer vision processor market could grow from $17.2 billion in 2023 to $45.7 billion in 2028 thanks to the growing demand from multiple verticals such as automotive, security and surveillance, and consumer electronics applications.
Ambarella’s product portfolio already includes chips that can handle AI workloads in those applications. For example, the company’s CV5 processor, based on a complex 5-nanometer (nm) process node, can run AI-based algorithms in automotive cameras, consumer cameras, and even robotics. Unsurprisingly, the company is seeing increasing demand for this procedure.
CEO Fermi Wang remarked on the company’s November 2024 earnings conference call that its new higher-priced AI inference processors, such as the CV5, are driving record AI revenue and also contributing toward a higher average selling price (ASP). The good part is that Ambarella expects the robust demand for CV5 to continue in fiscal 2026, which will begin next month. Additionally, the company estimates that the demand for its CV7 family of AI vision processors will pick up from the new fiscal year.
More importantly, this strong demand translates into exceptional expansion for Ambarella. Its earnings in the third quarter of fiscal 2025 (which ended October 31, 2024) rose 63% year-over-year to $82. 7 million. The chipmaker also reported adjusted earnings of $0. 11 per cent, compared with a loss of $0. 28 per cent last year.
Ambarella’s fiscal Q4 guidance of $78 million would translate into a 51% increase in its revenue from the year-ago quarter. The company is on track to finish fiscal 2025 with total revenue of $279 million, which would be a 23% improvement from the previous fiscal year. Its loss is expected to shrink to $0.30 per share from $0.83 per share in fiscal 2024.
As the following chart shows, Ambarella’s top and bottom lines are on track to improve further over the next couple of fiscal years, with the company expected to report an adjusted profit per share in fiscal 2027.
The overall AI computer vision market is expected to see impressive expansion over the next three years. Therefore, it would not be unexpected to see Ambarella generate the healthy expansion that Wall Street expects of it. The company could also build on its positive momentum. for longer as it claims to have a $2. 2 billion auto earnings pipeline through fiscal 2031.
Combined with the customers of AI pc vision processors in other spaces such as client cameras and safety applications, Ambarella would possibly have enough room to grow its business particularly in the long term.
The increasing demand for high-speed data transmission in AI servers is driving huge growth in the network device market. According to Morningstar, spending on generative AI networking appliances could increase at an annual rate of 34% between 2023 and 2028, generating $34 billion in annual profits through the end of the forecast period.
Lumentum Holdings is already benefiting from this trend, recording a big recovery in its monetary functionality in the last quarter. The Company’s earnings in the first quarter of fiscal 2025 (ended September 28, 2024) increased 6% year over year to $337 million. While it may not seem very impressive at first, investors note that Lumentum’s profits fell 23% in fiscal 2024 due to weak cloud demand. networking and commercial segments.
However, things have begun to thank AI. Its cloud and network profits rose 23% year-over-year in the first quarter of fiscal 2025, offsetting weakness in business activity. Now that cloud and networking account for about 84% of this business is expected to drive more potent expansion for the company.
Lumentum points out that its cloud customer base is growing with the addition of new hyperscale customers that are placing orders for its lasers that are used in fiber-optic cables to enable high-speed data transmission in AI servers. What’s more, Lumentum is busy expanding its manufacturing capacity so that it can fulfill more orders.
These favorable developments explain why Lumentum’s revenue estimate of $390 million for the current quarter would again be an improvement of 6% over the prior year. Even better, analysts are expecting the company’s growth rate to improve as the year progresses. Consensus estimates are projecting a 17% jump in Lumentum’s revenue for fiscal 2025 to $1.59 billion, which is expected to be followed by even stronger growth in the next fiscal year.
The strong earnings expansion is expected to be reflected in earnings, with Lumentum’s earnings expected to increase 56% in the current fiscal year to $1. 58 in line with participation, followed also by a healthy expansion over the next two years.
It won’t be surprising to see the market rewarding this tech stock with more upside thanks to its improving earnings power. That’s why it isn’t too late for investors to buy Lumentum Holdings as its cloud and networking business seems set for better times ahead thanks to AI.
Harsh Chauhan has none of the above values. The Motley Fool ranks and recommends Nvidia. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.
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