What happened

Shares of Ambarella Inc. (NASDAQ:AMBA) popped 15.2% in October, according to data from S&P Global Market Intelligence, after an analyst upgraded the video processing chip specialist.

More specifically, Ambarella's gradual rise last month started in earnest with a 6% pop on Oct. 12, when Canaccord Genuity analyst Matt Ramsay maintained his "buy" rating on the stock and increased his per-share price target to $65 from $58. For perspective, Ambarella stock closed on Tuesday at $54.68 per share.

Ambarella's A7L video processing chip attached to a camera lens


So what

To justify his increased bullishness, Ramsay argued that the market has undervalued Ambarella's growth potential, its engineering talent, and its intellectual property surrounding computer vision technology.

"We believe now is the time for long-term investors to build positions in Ambarella shares," he added in a note to clients. 

Now what

Ambarella has certainly endured more than its fair share of headwinds of late. With its fiscal second-quarter report in early September, Ambarella reduced its outlook to call for full fiscal-year revenue to decline in the range of 3% to 7%, down from flat year-over-year sales previously. For that, the company blamed a combination of weakness in the drone market, where Tier 2 customers are increasingly choosing cheaper chips, and lower-than-expected growth in the virtual-reality market.

At the same time, Ambarella was quick to remind investors that it's still enjoying solid growth from its IP security and OEM automotive segments. And speaking to Ramsay's upgrade, Ambarella's leading customers are set to start sampling its first computer vision chip, appropriately named "CV1," starting in its fiscal fourth quarter. If those customers' collective response is positive, it could be just the spark Ambarella needs to return to sustained, profitable growth, and to reward shareholders in the process.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.