In the world of artificial intelligence (AI), GPUs, chips, cloud computing, and data centers have been the market’s obsession over the past three years. But now a new obsession is emerging, called Physical AI, a rapidly evolving segment that could reshape the next phase of AI investing. One company, Ambarella (AMBA), is emerging as one of the pure-play ways to invest in this trend. Here’s why.
www.barchart.com What Is Physical AI and Why Could It Be the Next Major Investment Theme?
Physical AI refers to AI that interacts directly with the real world instead of simply generating text or images. In other words, it allows machines to see, understand, and react to their surroundings. Take, for example, industrial robots, autonomous vehicles, and robotic-assisted surgery systems, which are systems that require AI to operate with extremely low latency since every millisecond matters.
More Top Stocks Daily: Go behind Wall Street’s hottest headlines with Barchart’s Active Investor newsletter.
But Physical AI as a technology isn’t a brand-new idea. Long before ChatGPT captured the world’s attention, robots had been assembling cars, sorting packages, and moving warehouse inventories for years. Companies like Walmart (WMT), Target (TGT), and Albertsons (ACI) have been using Symbotic's AI-powered warehouse automation systems for years. Furthermore, medical device leaders like Intuitive Surgical’s (ISRG) da Vinci robotic systems have been performing minimally invasive surgeries for several years now. Similarly, Tesla’s (TSLA) full self-driving (FSD) technology has been known to the world for years as well.
What’s mostly changing now is the level of intelligence inside those machines. These next-generation robots are expected to see, reason, adapt, and make decisions using increasingly sophisticated AI models. This shift is why I believe Physical AI could become Wall Street's next biggest AI-related investment theme.
Where Ambarella Fits Into This Story
Companies like Tesla, Symbotic, and Intuitive Surgical build the end products that customers see. However, Ambarella fits deeper on the technology side even though the company is not a direct supplier for them. Ambarella designs and creates low-power AI chips that allow cameras, robots, vehicles, drones, and industrial machines to see, understand, and respond to the physical world using AI. Even better, the company provides an Edge AI platform, which is a combination of its AI chips (SoCs), software, AI tools, and computer vision technology, allowing manufacturers to build their own AI-powered products.
In its Q1 of fiscal 2027 earnings call, even Ambarella management repeatedly emphasized that Ambarella should no longer be viewed simply as a semiconductor company. Instead, they described it as a comprehensive Edge AI platform built around both hardware and software. The company has, in total, shipped over 46 million Edge AI SoCs and currently offers 12 Edge AI processors.
Ambarella generated $100 million in revenue in Q1, an increase of 16.9% year-over-year (YoY), reflecting continued demand for its Edge AI portfolio. The company also reported adjusted net income of $5 million, or $0.11 per diluted share, in the quarter. While automotive and security remain the company’s important businesses, robotics is emerging as one of its most promising markets. The company has already landed more than 15 design wins, including aerial drone programs, carrying an estimated lifetime revenue opportunity of more than $100 million. It is also working with over 30 prospective customers across its growing robotics pipeline.
Long-term agreements for its Edge AI platform that extend five years or longer are becoming a bigger part of its story. For instance, its newly announced partnership with Hanwha carries revenue potential exceeding $800 million over more than 10 years, making it one of the company’s largest commercial agreements. Under the agreement, Ambarella will co-develop Edge AI technologies spanning “physical security, operational automation, life sciences, robotics, and other industrial markets.”
As AI models become larger and more complex, management believes very few companies possess the expertise to combine advanced hardware and software into a single Edge AI platform. This gives the company a competitive edge in a market that is still in the early stages of growth.
Why Investors Are Willing to Pay a Premium for AMBA Stock
Today’s enthusiasm around AI mostly rests on cloud infrastructure or data centers. However, Physical AI is slowly coming to the limelight. And Ambarella is bringing this intelligence directly to vehicles, robots, industrial equipment, and smart cameras. Investors have noticed that and are willing to pay a premium for AMBA with expectations that Edge AI could become one of the semiconductor industry's fastest-growing markets over the coming decade. Analysts now project EPS growth of 27.4% in fiscal 2027 to $0.79, followed by another 45% in fiscal 2028 to $1.15. The stock is trading at a premium of 87x forward fiscal 2027 earnings, indicating that investors are already pricing in substantial future growth.
This indicates that the market is already valuing Ambarella as a high-growth AI company.
Overall, analysts remain moderately bullish about AMBA stock. Out of the 15 analysts covering the stock, seven have a “Strong Buy,” one has a “Moderate Buy” recommendation, and seven have a “Hold” rating. While AMBA is down 11% year-to-date (YTD), its average price target of $99.08 implies the stock can climb by 59% from current levels. Plus, the high target price of $120 implies a potential upside of 92% over the next 12 months.
www.barchart.com On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
Why Skyworks Stock Just Got Downgraded Why Verizon Stock Can Still Be a Good Choice for Income Investors MU Stock Alert: What to Know as Micron Teams Up With Qualcomm NVDA Stock Alert: What to Know as Nvidia Launches New AI Model