Nvidia The stock has been one of the biggest winners of the artificial intelligence (AI) revolution over the past few years, posting incredible gains of nearly 800% over the past two years on strong demand for data center graphics cards, but the past three months have been tough for the chipmaker.
Shares of the semiconductor giant have fallen 1% over the past three months. That’s a bit surprising considering Nvidia produced a remarkable series of results during that period that exceeded Wall Street expectations. Moreover, Nvidia’s guidance was also better than what analysts were looking for.
However, concerns about Nvidia’s ability to sustain its outstanding growth, its valuation and near-term pressure on margins that will be created by ramping up the latest generation of Blackwell processors appear to be weighing on the company’s share price. Meanwhile, two other little-known chip companies got a big boost in the past three months thanks to the positive impact of AI on their business: Ambarella(NASDAQ: AMBA) and Lumentum Holdings(NASDAQ: LITE).
While Ambarella’s stock has jumped 25% over the past three months, Lumentum’s is up nearly 23%. Their gains were better than what Nvidia delivered during this period, and the good part is that AI-focused growth drivers at both smaller chipmakers are just getting started.
Let’s check how AI proved to be a catalyst for Ambarella and Lumentum.
Chips designed by Ambarella are used in the automotive industry Internet of Things (IoT) applications. The company is primarily known for its computer vision chips that process images and video, but is now finding applications in the field of AI. According to one estimate, the AI computer vision processor market size could grow from $17.2 billion in 2023 to $45.7 billion in 2028, thanks to increasing demand from multiple verticals such as automotive, security and surveillance, and consumer applications. electronics.
Ambarella’s product portfolio already includes chips that can handle AI workloads in these applications. For example, the company’s CV5 processor based on an advanced 5-nanometer (nm) process node can power AI-based algorithms in automotive cameras, consumer cameras and even robotics. Not surprisingly, the company is witnessing an increase in demand for this processor.
CEO Fermi Wang noted at 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 to a higher average selling price (ASP). The good part is that Ambarella expects strong demand for the CV5 to continue into the 2026 fiscal year, which starts next month. In addition, the company estimates that demand for the CV7 family of AI vision processors will increase from the new fiscal year.
More importantly, this solid demand translates into outstanding growth for Ambarella. Its revenue in the third quarter of fiscal year 2025 (which ended October 31, 2024) grew an impressive 63% year-over-year to $82.7 million. The chipmaker also swung to adjusted earnings of $0.11 per share from a loss of $0.28 per share in the year-ago period.
Ambarella’s fiscal fourth-quarter guidance of $78 million would represent a 51% increase in revenue over last year’s quarter. The company is on track to end fiscal 2025 with total revenue of $279 million, which would be a 23% improvement over the previous fiscal year. Its loss is expected to narrow to $0.30 per share from $0.83 per share in fiscal 2024.
As shown in the following chart, Ambarella’s top and bottom lines are on track to improve further over the next few fiscal years, with the company expected to report adjusted earnings per share in fiscal 2027.
The overall AI computer vision market is set for impressive growth over the next three years, so it won’t be surprising to see Ambarella deliver the healthy growth that Wall Street expects of it. The company could maintain its positive momentum over the longer term as it claims to have $2.2 billion in automotive revenue by fiscal 2031.
Throw in the prospects for AI computer vision processors in other areas such as consumer cameras and security applications, and Ambarella could have room to grow its business significantly over the long term.
The growing demand for high-speed data transfer in AI servers is driving the strong growth of the network equipment market. According to Morningstar, spending on generative AI networking equipment could increase at an annual rate of 34% between 2023 and 2028, generating $34 billion in annual revenue by the end of the forecast period.
Lumentum Holdings is already benefiting from this trend, witnessing a nice turnaround in its financial results last quarter. The company’s revenue in the first quarter of fiscal 2025 (which ended September 28, 2024) rose 6% year-over-year to $337 million. While that may not seem impressive at first, investors should note that Lumentum’s top line fell 23% in fiscal 2024 due to weak demand from the cloud and networking and industrial segments.
However, things have started to change for the better thanks to AI. Its cloud and networking revenue jumped 23% from a year ago in the first fiscal quarter of 2025, offsetting weakness in its industrial business. With cloud and networking now making up nearly 84% of Lumentum’s top line, this business will drive stronger growth for the company.
Lumentum points out that its cloud client base is growing with the addition of new hyperscale customers placing orders for its lasers used in fiber-optic cables to enable high-speed data transfer in AI servers. Moreover, Lumentum is working to expand its production capacity to be able to fulfill more orders.
These favorable developments explain why Lumentum’s revenue estimate of $390 million for the current quarter would again be a 6% year-over-year improvement. Moreover, analysts expect the company’s growth rate to improve as the year progresses. Consensus estimates project Lumentum’s revenue to jump 17% for fiscal 2025 to $1.59 billion, with even stronger growth expected to follow next fiscal year.
Strong headline growth is expected to filter through to the bottom line, with Lumentum’s earnings expected to jump 56% in the current fiscal year to $1.58 per share, followed by healthy growth over the next few years as well.
It won’t be surprising to see the market reward this tech stock with more upside thanks to its increasing earning power. That’s why it’s not too late for investors to buy Lumentum Holdings as its cloud and networking businesses appear poised for better times thanks to artificial intelligence.
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Sharp Chauhan has no position in any of the listed stocks. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.
