Meet the Skyrocketing Artificial Intelligence (AI) Stock That's Leaving Nvidia in the Dust

Key Points

• Nvidia is the leading AI chip company right now, but niche chipmaker Ambarella is recording healthy revenue and earnings growth as well.

• Demand for edge devices that are AI-capable is increasing at a nice clip, and investors can capitalize on that secular growth opportunity by investing in Ambarella.

• The AI stock is still trading at an attractive valuation despite its outstanding growth.

• 10 stocks we like better than Ambarella ›

Nvidia (NASDAQ: NVDA) and artificial intelligence (AI) have become synonymous with each other in the past couple of years as the company's graphics processing units have played a vital role in powering this new technology.

After all, companies and governments around the world have been buying Nvidia's most powerful chip systems for the past three years to train AI models and run inference applications. And Nvidia has continued to deliver remarkably solid growth quarter after quarter, even after it became the world's largest company by market cap.

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For instance, its revenue in the second quarter of its fiscal 2026 was up by an impressive 56% from the year-ago period to just under $47 billion. Management is expecting another healthy increase of 54% in the current quarter to $54 billion. However, the market's concerns about Nvidia's business in China are weighing on the stock.

But at the same time, the market has been rewarding Ambarella (NASDAQ: AMBA) handsomely of late. The less well-known chipmaker's stock price has jumped 52% in the past three months -- twice as fast as Nvidia grew during the period. And the smaller semiconductor stock has the potential to deliver even more gains.

Image source: Getty Images.

AI has supercharged Ambarella's growth

Ambarella designs computer vision processors that are deployed in drones, vehicles, security cameras, and other devices. Its chips are gaining terrific traction in edge devices that are intended to handle AI processes locally.

This helps explain why Ambarella's revenue jumped 50% year over year to $95.5 million in its fiscal 2026 second quarter, which ended on July 31. What's more, the company posted a non-GAAP profit of $0.15 per share as compared to a loss of $0.13 per share in the prior-year period. Management pointed out on the earnings conference call that its edge AI revenues have now set fresh records for five consecutive quarters.

The company expects edge AI processors to account for 80% of its overall revenue this year. Importantly, the rising demand for its chips for various uses in drones, video cameras, and vehicles has encouraged management to increase its full-year guidance. It now forecasts that its revenue will rise by 33% in fiscal 2026 to $379 million, up from an earlier forecast of 22% growth.

This improved outlook is backed by the new customer wins Ambarella scored last quarter across various markets, as well as a production ramp-up of chips that are destined to go into robotic drones and edge AI devices. Another thing worth noting is that Ambarella's edge AI processors are driving an improvement in its average selling price, which explains how the company reported a major improvement in its bottom line.

Even better, Ambarella is confident that it will be able to sustain its AI-fueled growth over the long run. The company projects that its serviceable addressable market in edge AI chips could increase at an annual rate of 18% over the next five years to $12.9 billion. The company also believes that it is in a position to grow at a faster pace than its addressable market does and thus win a larger market share.

However, don't be surprised to see Ambarella sustaining its terrific growth levels for a much longer period. According to an estimate from market research from Market.US, the edge AI processor market's revenue could jump by 20 times over the next decade. That growth will be driven by the faster processing that edge AI processors are capable of, which is the reason why their adoption in autonomous vehicles and industrial applications is set to rise.

An attractive valuation and the improving growth potential make it a buy right now

Ambarella stock popped by nearly 17% after the company released its latest quarterly results on Aug. 28. Yet even after that gain, the stock trades at just under 10 times sales, which isn't very expensive when compared to the U.S. technology sector's average price-to-sales ratio of 8.5. The company has demonstrated that it is capable of clocking stronger top-line growth, and analysts have upgraded their expectations on that score as well.

AMBA Revenue Estimates for Current Fiscal Year data by YCharts.

However, the sizable opportunity in the edge AI market and Ambarella's ability to grab a bigger slice of this pie could help it exceed Wall Street's expectations again. As such, this little-known AI stock looks worth buying, as its impressive growth is likely to be rewarded with a higher share price.

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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.