Despite reporting better-than-expected Q3 FY2026 results, Ambarella (AMBA.US) shares fell approximately 19% to $73.89 at Wednesday's close. However, analysts largely praised the performance. Morgan Stanley maintained an "Overweight" rating with a $96 price target, highlighting another solid quarter of execution in the IoT business.
The analyst team led by Joseph Moore noted, "Edge-AI momentum remains strong, with IoT driving near-term upside, while robust operating leverage is evident—despite some margin pressure from product mix shifts. We remain optimistic about the company’s long-term automotive prospects and its technological edge, but IoT will continue to support growth for now."
Analysts pointed out that IoT played a dominant role this quarter, as expected, with particularly strong contributions from portable video and other segments, including action cameras, wearables, and panoramic systems.
However, gross margins came in below expectations due to higher-volume customer engagements in Q4, leading to lower profitability. Ambarella emphasized its priority remains increasing total gross profit. Management is willing to accept lower gross margins for specific volume opportunities but remains committed to its long-term target range of 59%–62%.
Despite persistent mixed headwinds, higher revenue and stable operating expenses are driving solid operating leverage. Analysts expect Q4 operating profits to rise even with margin compression.
Moore’s team added, "Looking ahead, Ambarella remains confident in the IoT product cycle, with demand expanding beyond security into portable video, drones, and early-stage robotics. We expect these edge-AI categories to grow steadily, supporting IoT growth over the next year—outpacing automotive growth."
Needham reiterated a "Buy" rating with a $100 price target. Analysts led by Quinn Bolton stated, "Ambarella delivered another quarter of execution and growth, fueled by rising demand for high-end AI applications. Key takeaways include: 1) Strong Q4 FY2026 revenue guidance, with FY2026 revenue growth raised to 36%–38% YoY (vs. prior 31%–35%); 2) Lower-than-expected Q4 gross margins due to product mix shifts toward higher-volume customers. Despite margin declines, revenue, operating income, and EPS estimates were raised for Q4."
Other notable highlights included management citing three tailwinds from expanding high-end AI applications, along with securing over 10 design wins in automotive and IoT during Q3 FY2026.
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