Microcontroller expert Atmel (Nasdaq: ATML) is loving life right now.

Its stock shot up by as much as 13% in early trading, thanks to a brilliant third-quarter report. Atmel shareholders have now seen 160% returns over the last year, and the stock hasn't been this expensive since 2002. And it's all for good reason.

Third-quarter sales jumped 40% year over year, and 13% quarter over quarter, to $444 million, riding a wave of touchscreen-controller design wins in products such as the Samsung Galaxy Tab, the Motorola (NYSE: MOT) Droid X, and the HTC EVO 4G. Atmel is also busy realigning its sales for a heavier emphasis on high-margin microcontrollers, while consolidating its manufacturing processes in its Colorado Springs facilities. All of these ingredients helped push Atmel's gross margins to 47%, a level not seen since 1996 and 6 full percentage points above last quarter.

A $150 million windfall from a positive outcome in an IRS tax audit shot GAAP earnings up to $0.47 per diluted share, but even without that tax gain and other one-time benefits, Atmel obliterated market expectations with $0.18 non-GAAP earnings line.

Continued high demand for smartphones and the rising trend of tablet computers are two strong winds in Atmel's sails. Like rivals Cypress Semiconductor (Nasdaq: CY) and Microchip Technologies (Nasdaq: MCHP), it seems like this company can do no wrong at the moment. In my book, Atmel runs neck-and-neck with Cypress as an investment opportunity, and this report did nothing to weaken Atmel's case.

This is another happy milestone in Atmel's ongoing turnaround story. There seems to be plenty of fuel left in the company's growth rockets, though the even faster share-price boost makes me wonder whether we mightn't have seen the best of this stock already.

Add Atmel to your watchlist, and then drop down to the comments box to discuss your investment thesis on Atmel -- or lack thereof.

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