Why Ambarella Inc. Stock Jumped 23% in May

By Markets Fool.com

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What: Shares of Ambarella , which makes microchips to process high-definition digital video data, soared 23% higher in May according to data from S&P Capital IQ.

So what: In May, analysts said that the chip designer could be a takeover target for QUALCOMM , which recently raised $10 billion of new debt, with as much as half of that balance earmarked for acquisitions. Ambarella covers an attractive market where mighty Qualcomm isn't a factor today. The focus on high-quality signal processing has made Ambarella the chipmaker of choice for quality-minded camera specialists such as GoPro, which represents about one-third of Ambarella's sales right now. Qualcomm would love to get a piece of that high-octane action, though the company hasn't confirmed this speculation.

Now what: Ambarella has gained another 5% so far in June thanks to a strong first-quarter report. Ambarella investors have seen their shares prices nearly double so far in 2015, almost quadruple over the last 52 weeks, and gain 1,500% since the company went public in October 2012. That's a sixteen-fold return on the original investment in just two and a half years.

Major Ambarella customers such as GoPro and Dropcam are going through their own massive growth spurts, which lift the value of their exclusive video processor provider. Next up, Ambarella and its favorite device-building clients are attacking the Internet of Things, the emerging market for consumer-level drones, and more.

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May was just another month of crazy returns for a stock with lots of similar surges under its belt. I can't promise a smooth ride to the stratosphere, but there's no denying that Ambarella's momentum currently looks unstoppable.

Then again, Ambarella's price-to-earnings ratio also keeps climbing ever higher. If the company runs into any turbulence, the stock seems primed for a drastic downward correction. It's been a smooth ride so far, but Ambarella investors might want to buckle up just in case (and be ready to pounce on potential overreactions to the downside).

The article Why Ambarella Inc. Stock Jumped 23% in May originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Ambarella, Apple, and GoPro. The Motley Fool owns shares of Ambarella, Apple, GoPro, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.