Prediction: This Artificial Intelligence (AI) Chip Stock Will Soar Higher After Feb. 26 (Hint: It's Not Nvidia)

Ambarella (NASDAQ: AMBA) may not be a household name in the artificial intelligence (AI) semiconductor market, where Nvidia has established a dominant position for itself thanks to its powerful data center graphics cards.

But investors will be surprised to know that the former has considerably outshone the latter over the past six months. While Nvidia stock has appreciated 13% during this period, Ambarella has clocked much stronger gains of 64%.

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Nvidia's impressive stock market rally has lost momentum of late thanks to multiple factors outside of the company's control, though it won't be surprising to see this semiconductor bellwether regaining its mojo when it releases its quarterly results on Feb. 26.

Meanwhile, Ambarella is also going to announce its latest results (for its fiscal 2025 fourth quarter) after the market closes on Feb. 26. There is a good chance that its results could exceed Wall Street's expectations and give its stock a nice shot in the arm. Let's see why that may be the case.

AI-powered demand could help Ambarella deliver solid results

Ambarella designs computer vision processors for "edge devices" such as autonomous vehicles, security cameras, drones, Internet of Things (IoT) devices, and wearables. An edge device processes and analyzes data locally instead of sending it to a server, and so it provides results in real time.

Demand for AI-enabled edge devices is expected to grow rapidly. According to one estimate, the edge AI hardware market's revenue could more than double over the next five years. Ambarella gives investors an opportunity to capitalize on the proliferation of edge AI devices. Rosenblatt Securities estimates that Ambarella could be one of the beneficiaries of the purported breakthrough achieved by Chinese AI start-up DeepSeek.

The low-cost AI model developed by DeepSeek could spur the use of AI applications in edge devices, according to Rosenblatt analyst Kevin Cassidy. As a result, the demand for processors capable of handling AI tasks at the edge should also increase. The good part is that Ambarella is already witnessing strong growth in revenue and earnings thanks to AI.

The company achieved "record levels of AI revenue which in turn contributed to a higher blended average selling price" in the third quarter of fiscal 2025 (which ended on Oct. 31, 2024). Ambarella's top line shot up an impressive 63% year over year during the quarter, and it reported a non-GAAP (adjusted) profit, compared to a loss in the year-ago period.

Ambarella has guided for fiscal Q4 revenue of $78 million at the midpoint of its guidance range. That would be a 51% jump from the year-ago period. Consensus estimates are projecting a loss of $0.02 per share, compared to a much bigger loss of $0.24 per share in the prior-year period. However, don't be surprised to see Ambarella delivering stronger growth, as the company has been witnessing "better than expected adoption of our AI SoCs in Other IoT markets."

The company has started sampling a new edge AI processor with customers in the automotive space as well. All this suggests that Ambarella may be on its way to beating Wall Street's expectations once again later this month, just like it has done in the past four quarters.

The company seems well-placed for robust growth

Ambarella points out that 70% of its revenue in fiscal Q3 came from edge AI applications. Automotive accounts for two-thirds of revenue, while the remaining comes from AI-based IoT applications.

Management sees its serviceable market growing from around $5 billion in fiscal 2024 to nearly $9 billion in 2027. The company aims to roll out new computer vision processors over the next couple of years in a bid to sustain the impressive growth it has been clocking of late. The company is forecasting 23% growth in fiscal 2025, which means that it ended its latest fiscal year with $279 million in revenue.

The forecast for the next couple of years points toward healthy double-digit growth.

AMBA Revenue Estimates for Current Fiscal Year data by YCharts

What's more, Ambarella's healthy top-line growth is set to filter down to the bottom line as well. Analysts are projecting the company to become profitable on a non-GAAP basis in the next fiscal year.

AMBA EPS Estimates for Current Fiscal Year data by YCharts

The market could reward the substantial improvement in Ambarella's bottom line with more upside on the stock market. Ambarella's shares have a 12-month price target of $95, as per 15 analysts covering it, pointing toward 22% gains from current levels, and they could do even better. If you're looking to add an AI stock to your portfolio, consider Ambarella, as it may jump higher after another set of solid quarterly results on Feb. 26.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.