We recently published a list of 10 Best Semiconductor Equipment Stocks to Buy Now. In this article, we are going to take a look at where Ambarella, Inc. (NASDAQ:AMBA) stands against other best semiconductor equipment stocks to buy now.
Semiconductors are the modern-day equivalent of oil when it comes to the general well-being of the global economy. Tens of thousands of gadgets, computers, cars, and other items and products rely on a steady stream of chips to power up today’s world. As a result, chip manufacturers often have a steady flow of orders that they have to consistently churn out to ensure that a multitude of industries are not disrupted.
However, while chip manufacturers often see most media coverage, the complex nature of transforming sand into a chip capable of 20 petaflops of output requires thousands of steps. To execute these steps, manufacturers rely on a diverse set of suppliers for a myriad of products such as chip manufacturing machines, specialty chemicals, masks, design technologies, and other items. Firms that provide these products and technologies are called semiconductor equipment providers and their role in the industry is just as important as the chip manufacturers’ is.
To understand why semiconductor equipment stocks are important, consider the Biden Administration’s $280 billion CHIPS and Science Act. Signed by the President in 2022, it aims to ensure that the American semiconductor industry catches up to its peers in Taiwan and South Korea and is not dependent on any disruptions in the South China Sea. The biggest beneficiary of the CHIPS Act is the Taiwanese contract chip manufacturer that leads the world in manufacturing technologies. It ranked 4th on our recent list of trending AI stocks, and the firm has received $6.6 billion in direct funding and it is eligible for $5 billion in additional loans to set up advanced manufacturing facilities in Arizona.
Yet, even though the first of these facilities is set to start production in the first half of 2025, the fact that the firm’s operations are based in Taiwan is already creating problems. For starters, a report from Reuters suggests that the world’s leading AI GPU manufacturer (which ranked 3rd on our list above) might have to ship its GPUs to Taiwan for packaging after they’ve been manufactured in the US. This is because after the chips are manufactured, they have to be packaged to ensure power supply and communications with the rest of the computer system.
The packaging technologies for these advanced chips are called Chip-on-Wafer-on-Substrate (CoWoS), and for the Taiwanese firm, all of its packaging facilities are located in its home region. The need to ship the chips to Taiwan for packaging is not the only hurdle for the fab’s American manufacturing operations. Another problem, and one that is directly related to semiconductor equipment stocks, relates to the different chemicals that are required throughout the chip manufacturing process.
These chemicals include sulfuric acid, acetone, ammonium hydroxide, and others to ensure the purity of the silicon wafer throughout the fabrication process. However, according to a report from Macquarie Bank, since the Taiwanese fab relies on Taiwan-based firms for its chemical supply chain, the costs of manufacturing chips at the Arizona site could be 30% higher than in Taiwan. The higher costs stem from the fact that the chemical companies are hesitant to move to the US since they might be unable to enjoy economies of scale and the resulting cost benefits. The bank outlines that the lack of an American chemical supply chain that is qualified by the Taiwanese fab means that chemicals such as sulfuric acid might be costlier to ship internationally than their list price.
Therefore, it’s clear that semiconductor equipment firms play an equally important role in chip fabrication. Another important example of this fact is the Dutch chip manufacturing machinery provider that ranked 9th on a recent list of AI news and ratings that Wall Street was watching. This firm is the only company in the world capable of manufacturing high-end chip-making tools called EUV scanners. Without these tools, firms such as the Taiwanese fab cannot make leading-edge chips with feature sizes smaller than 7-nanometer. In fact, the rising threat of China utilizing Western technologies for military use has also led the US government to stop the chip manufacturing equipment provider from selling its equipment to China’s Semiconductor Manufacturing International Corporation (SMIC). The sanctions have dealt a sharp blow to Chinese chip manufacturing ambitions, with the latest chip from Huawei still being manufactured on the older 7-nanometer node. In contrast, the latest iPhone uses chips built through the 3-nanometer process technology.
Our Methodology
To make our list of the best semiconductor equipment stocks to buy, we ranked all US-listed semiconductor equipment stocks by the number of hedge funds that had bought the shares in Q3 2024 and picked out those with the highest number of investors.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A scientist in a lab coat and goggles operating a state-of-the-art semiconductor production line.
Ambarella, Inc. (NASDAQ:AMBA)
Number of Hedge Fund Holders In Q3 2024: 30
Ambarella, Inc. (NASDAQ:AMBA) provides semiconductor equipment and materials that are used in video cameras and image processing solutions. These products mean that the firm performs well when the automotive, industrial, and internet-of-things (IoT) industries are performing well. As a result, Ambarella, Inc. (NASDAQ:AMBA)’s shares have recently started to gain momentum after they were down 1.7% by late November. The tailwinds are from expected improvement in the IoT and industrial sectors, with the firm’s third-quarter earnings accompanied by a $78 million Q4 revenue guide which beat analyst estimates of $69.1 million. During the quarter, Ambarella, Inc. (NASDAQ:AMBA) also grew revenue by 63% annually on the back of strong demand for automotive and IoT products. Looking ahead, continued recovery in these markets could create tailwinds for the firm.
Ambarella, Inc. (NASDAQ:AMBA)’s management commented on its AI products during the Q3 2025 earnings call. Here is what they said:
“Company-specific factors more than offset the overall weakness in the market, with our strength originating from our customers’ new product ramps, especially those incorporating our new higher-priced AI influence processors such as CV5. We again achieved a record level of AI revenue, which in turn contributed to a higher blended average selling price. We are now forecasting fiscal 2025 revenue to increase by 22% to 24% year-over-year versus our prior estimate for revenue growth in the mid- to high teens.
Last quarter, we described our new product momentum as a series of waves and the next year in fiscal 2026, we expect the first wave from CV5 to continue and be augmented with the commitment of the second wave CV7. We expect the first and second new product waves to enable us to grow revenue again in fiscal 2026 with both auto and IoT expected to grow despite the weakness in the overall market. Our CV3 AD family of SoCs for Level 2+ and high level of autonomy represents the third wave with revenue expected to commence in calendar year 2026 or our fiscal 2027. During the third quarter, we received the first silicon of our CV3-AD655 AI SoC, which targets advanced Level 2+ applications, including mass-market passenger vehicles, and we are now delivering engineering samples to customers.”
Overall, AMBA ranks 8th on our list of best semiconductor equipment stocks to buy now. While we acknowledge the potential of AMBA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AMBA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.