Why Ambarella Inc's Shares Popped 14% in July

By Markets Fool.com

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GoPro Hero Session is just one product Ambarella provides technology for. Image source: GoPro.

What: Shares of camera chipmaker Ambarella Inc (NASDAQ: AMBA) jumped 14% in July, according to data provided by S&P Global Market Intelligence, as investors bet that demand for the company's products would return in the second half of the year.

So what: The biggest driver of Ambarella over the past year has been GoPro, for both good and bad. GoPro's struggles in the second half of 2015 and early 2016 hit Ambarella hard, so with GoPro expecting a recovery in demand in the second half of the year, there could be upside for the chipmaker as well.

GoPro's launch of Hero 5 and the Karma drone is expected to bring GoPro back to profitability, and likely growth as well. It will also mark the end of GoPro cutting channel inventory; it should now ramp into building inventory for the holidays. All of this should be good news for Ambarella and will start hitting the company's financial statements in the third quarter of 2016.

Now what: Ambarella isn't only reliant on GoPro for demand, but it is a key customer, so the stock often trades with the sentiment around GoPro. Getting GoPro back to growth would be a positive for Ambarella and would potentially bring back growth later in the year.

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What investors should watch for going forward is the continued diversification of the business as well as the impact GoPro has on operations. If GoPro grows and new customers adopt the company's technology, it could be a win-win and keep shares charging higher in 2016.

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Travis Hoium owns shares of GoPro. The Motley Fool owns shares of and recommends Ambarella and GoPro. 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.