Nvidia stock has emerged as a standout performer in the artificial intelligence (AI) sector over the last couple of years, achieving a staggering 800% growth due to the surging demand for its data center graphics cards. However, the past three months have posed challenges for this chipmaking giant. Despite the impressive overall performance, Nvidia’s stock has experienced a slight decline of 1% in the last quarter, which is unexpected given the company’s remarkable earnings results that outperformed Wall Street projections. Additionally, Nvidia’s forward guidance exceeded analysts’ expectations, highlighting its potential for ongoing success.
Despite this encouraging performance, there are growing concerns surrounding Nvidia’s ability to maintain its exceptional growth trajectory, especially regarding its current valuation and potential margin pressure stemming from the introduction of its next-gen Blackwell processors. In contrast, two lesser-known chip companies have seen significant gains in the same timeframe due to AI’s beneficial effects on their operations: Ambarella (AMBA 3.34%) and Lumentum Holdings (LITE 5.65%).
Ambarella’s stock has surged by 25% over the past three months, while Lumentum has experienced a nearly 23% increase. These remarkable gains outpace Nvidia’s performance during the same period, indicating that the AI-driven growth strategies of these smaller chipmakers are just beginning to take effect. This trend underscores the transformative impact of AI on various sectors and creates a compelling narrative for investors looking for promising opportunities in the tech landscape.
Let’s delve deeper into how AI is acting as a powerful catalyst for growth for both Ambarella and Lumentum.
Unlocking Potential: Ambarella’s AI-Driven Growth
Ambarella specializes in designing chips for a range of applications, particularly in the automotive and Internet of Things (IoT) sectors. The company is renowned for its advanced computer vision chips that process video and images, and these are increasingly being utilized in AI applications. Market estimates suggest that the demand for AI computer vision processors could skyrocket from $17.2 billion in 2023 to an astounding $45.7 billion by 2028. This growth is driven by heightened requirements across various verticals, including automotive, security, surveillance, and consumer electronics.
Ambarella’s existing product lineup already includes chips designed to handle AI workloads efficiently within these sectors. For example, its innovative CV5 processor, built on a cutting-edge 5-nanometer (nm) process technology, is adept at executing AI algorithms in various applications, including automotive cameras, consumer electronics, and robotics. Consequently, the demand for the CV5 processor is witnessing a substantial increase, reflecting the broader trend towards AI integration.
During Ambarella’s November 2024 earnings conference call, CEO Fermi Wang highlighted that the company’s new premium-priced AI inference processors, such as the CV5, are significantly boosting AI revenue and enhancing the average selling price (ASP) of their products. Looking ahead, Ambarella anticipates robust demand for the CV5 to persist into fiscal 2026, which commences next month. Furthermore, expectations are high for the CV7 family of AI vision processors to gain traction in the upcoming fiscal year.
This surge in demand is translating into notable financial success for Ambarella. The company reported a remarkable 63% year-over-year revenue growth in the third quarter of fiscal 2025, totaling $82.7 million. Additionally, Ambarella transitioned to an adjusted profit of $0.11 per share, a significant turnaround from a loss of $0.28 per share during the same period last year.
Ambarella’s guidance for fiscal Q4 projects revenues of $78 million, which would represent a 51% increase compared to the same quarter last year. The company is on track to conclude fiscal 2025 with total revenue estimated at $279 million, reflecting a 23% year-over-year improvement. Its anticipated loss is expected to narrow to $0.30 per share, compared to $0.83 per share in fiscal 2024.
As illustrated in the following chart, Ambarella’s revenue and profit margins are poised for further enhancement over the next couple of fiscal years, with an expectation to report adjusted profit per share in fiscal 2027.
AMBA Revenue Estimates for Next Fiscal Year data by YCharts
The overall AI computer vision market is expected to experience impressive expansion over the next three years. Given this trajectory, it is reasonable to anticipate that Ambarella will deliver the strong growth that Wall Street forecasts. Moreover, the company boasts a robust automotive revenue pipeline valued at $2.2 billion projected through fiscal year 2031, suggesting that it could sustain its positive momentum for an extended period.
When considering the potential applications of AI computer vision processors in other areas such as consumer cameras and security technologies, Ambarella appears well-positioned for significant long-term growth.
Harnessing AI for Growth: Lumentum Holdings’ Strategic Advantage
The escalating demand for high-speed data transmission in AI servers is propelling substantial growth within the networking equipment sector. According to Morningstar, spending on generative AI networking equipment is projected to grow at an annual rate of 34% from 2023 to 2028, ultimately generating an impressive $34 billion in annual revenue by the end of the forecast period.
Lumentum Holdings is capitalizing on this trend, experiencing a notable turnaround in its financial performance during the last quarter. The company reported a 6% year-over-year revenue increase to $337 million in the first quarter of fiscal 2025, which ended on Sept. 28, 2024. While this growth may seem modest initially, it is important to recognize that Lumentum’s revenue had previously declined by 23% in fiscal 2024 due to reduced demand from the cloud, networking, and industrial segments.
Fortunately, the landscape has begun to shift positively due to the integration of AI technologies. Specifically, Lumentum’s revenue from cloud and networking solutions surged by 23% year-over-year in fiscal Q1 2025, effectively mitigating the downturn experienced in its industrial segment. With cloud and networking now accounting for nearly 84% of Lumentum’s total revenue, this sector is anticipated to drive substantial growth for the company moving forward.
Lumentum has highlighted that its cloud customer base is expanding, fueled by new orders from hyperscale customers who require its lasers for fiber-optic cables that facilitate high-speed data transmission in AI servers. In response, Lumentum is actively enhancing its manufacturing capacity to fulfill the growing demand for its products.
These positive developments contribute to a revenue estimate of $390 million for the current quarter, reflecting a 6% improvement over the previous year. Moreover, analysts project an even more robust growth trajectory for Lumentum as the year progresses, with consensus estimates indicating a 17% increase in revenue for fiscal 2025, reaching a total of $1.59 billion, followed by even stronger growth in the subsequent fiscal year.
LITE Revenue Estimates for Current Fiscal Year data by YCharts
This impressive top-line growth is expected to translate into substantial bottom-line gains, with Lumentum’s earnings projected to soar by 56% in the current fiscal year, reaching $1.58 per share, followed by continued healthy growth in the coming years.
LITE EPS Estimates for Current Fiscal Year data by YCharts
Given the positive trajectory of Lumentum’s earnings potential, it is likely that the market will respond favorably, rewarding this tech stock with further upside. Consequently, it is not too late for investors to consider acquiring shares in Lumentum Holdings, as the outlook for its cloud and networking business appears bright, thanks to the continued advancements in AI technology.
