Although Ambarella (AMBA.US) reported better-than-expected results for Q3 FY2026, its stock still fell about 19% to $73.89 at Wednesday's close. However, this performance was largely viewed positively by analysts.

Morgan Stanley maintained its "Overweight" rating on the stock with a $96 price target, noting that the execution in the Internet of Things (IoT) business had another good quarter.

The analyst team led by Joseph Moore stated: "Edge-AI momentum remains strong, with IoT driving the near-term uplift, while solid operating leverage is also evident, despite some margin pressure from product mix shifts. We remain positive on the company's longer-term automotive prospects and are confident in its technology, but IoT will support growth for now."

The analysts pointed out that, as expected, IoT played a leading role this quarter, with a particularly notable contribution. This was driven by portable video and other areas, where multiple categories – including action cameras, wearables, and 360-degree systems – remain strong.

The analysts added that, according to guidance, the company's gross margin was below expectations because Q4 will see participation from more high-volume customers. This led to lower gross margins, but Ambarella emphasized that its priority is increasing total gross profit dollars. The analysts noted that management is willing to consider lower gross margins for specific volume opportunities but remains committed to the corporate target range of 59% to 62%.

According to the analysts, although the company expects mixed headwinds to persist, higher revenue and stable operating expenses are creating solid operating leverage. Analysts anticipate operating profit will increase in Q4 even with the gross margin decline.

Moore and his team said: "Looking ahead, Ambarella believes the IoT product cycle remains strong, with its market demand expanding from security into areas like portable video, drones, and early-stage robotics. We expect these edge AI categories to continue expanding, driving steady IoT growth over the next year, during which we expect IoT growth to outpace automotive growth."

Needham maintained its "Buy" rating on Ambarella stock with a $100 price target. Analysts led by Quinn Bolton said: "Ambarella delivered another quarter of execution and growth, fueled by increasing demand for high-end AI applications. Our key takeaways include: 1) Strong Q4 FY26 revenue guidance, with FY26 revenue growth expectations raised to 36%-38% YoY (previous expectation was 31%-35% YoY); 2) Q4 gross margin was below expectations due to product mix shifting towards higher-volume customers. Despite the lower gross margin, our estimates for Q4 revenue, operating income, and EPS increased."

According to the analysts, other key takeaways are as follows – the company's management pointed to three favorable factors in the expansion of high-end AI applications; and in Q3 FY2026, the company secured over ten design wins in automotive and IoT applications.