Why Ambarella Inc Stock Popped 22% in August

By Markets Fool.com

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What happened

Shares of Ambarella(NASDAQ: AMBA) spiked 24%in August, according to data provided by S&P Global Market Intelligence, on positive news coming from one of the company's primary businesses -- selling image processing chips to GoPro (NASDAQ: GPRO). The possibility of Ambarella chips powering GoPro's upcoming HERO 5 camera and brand new Karma drone had investors in a tizzy last month.

So what

Ambarella's stock price isn't completely dependent on developments at GoPro, but it's pretty close. The company does have a solid business selling components for surveillance cameras, dashboard cameras, and a few other camera markets, but significant revenue comes from the processing chips that go to the action camera leader.

That has been both a blessing and a curse as GoPro's skyrocketing camera sales have slowed over the past few quarters. But their closely tied fates began to rebound again after GoPro posted a strong second quarter that beat analyst estimates.

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In a press release, GoPro said, "HERO5 and Karma will contribute to the largest introduction of products in our history, all in time for what we believe will be GoPro's most exciting fourth quarter, ever -- a quarter where we expect to return to profitability."

That helped drive Ambarella's stock price up in August as investors are hoping, probably rightly so, that the company will win a spot in both devices.

Now what

What's great for Ambarella investors is that the company is not only riding high on GoPro's news, but it also delivered strong results for its second quarter at the beginning of September.

The company reported revenue of $65.1 million, down 22.6% year-over-year but at the high end of the company's guidance for the period. And Ambarella appears to be moving in the right direction with its guidance -- management said revenue will return to year-over-year growth in the fiscal third quarter. That will be a huge improvement for the company and prove that investors' optimism in the stock isn't unwarranted.

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Chris Neiger has no position in any stocks mentioned. 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.