Another Solid Semiconductor Stock

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A little while back I wrote about Micron Technologies (NASDAQ: MU), a semiconductor stock that had just emerged from a legal dispute with Rambus Inc.  The stock was down in value to a little over two times its cash holdings.  The company was a leading supplier of its product line, Dynamic Random Access Memory (DRAM), and it had yet to recover the value it lost during the period the lawsuit was pending.  The stock has since gone from $5.65 per share to $8.28. 

OmniVision Technologies (NASDAQ: OVTI) is a semiconductor stock that finds itself in a similar position to Micron.  Their current stock price is a little over two times the value of their cash holdings.  They are also a leading supplier of their product line, CMOS image sensor chips (more on what those are later).

The balance sheet for OmniVision is very healthy.  Current assets outweigh their total liabilities by double.  Considering a large portion of those current assets are liquid cash, the company’s financial position is very strong.

In relative valuations, OmniVision looks like a steal.  The price to sales ratio is below 1 and the price to earnings ratio is hitting a 52-week low at a paltry 7. This incredibly pessimistic valuation comes after they just booked a year of both record revenues and record sales volumes. 

*Graphic From OmniVision’s Sept. 29, 2011, investor presentation

The stock is trading at an attractive valuation because of concerns over growth.  Last quarter, earnings were down year over year.  As usual, Wall Street focuses on the recent news and extrapolates it into the future.  Earnings grew year on year for eight quarters before the last quarter's dissapointment.

This is a company that is a leader in its market and supplier to many different sectors.  Their shares of CMOS shipments for each sector are depicted in red.

*Graphic From OmniVision’s Sept. 29, 2011, investor presentation

CMOS (Complementary Metal Oxide Semiconductor) image sensor chips compete with charge-coupled device (CCD) chips in the sectors above.  CMOS chips are cheaper and more energy-efficient than CCD chips.  The quality of the images CMOS chips deliver is rapidly improving.  This will allow OmniVision to tap in to the higher resolution market while still being able to undercut CCD alternatives.

Having an advantage in the higher resolution market is important because its a huge growth area.  Higher resolution chips are where the Smart Phone market has pushed to (I tend to ignore projections, but CY10 and CY11 clearly show this trend).

*Graphic From OmniVision’s Sept. 29, 2011, investor presentation

So here you have a company that sells VGA chips that can compete on cost in the low resolution space, but is also making inroads into the higher resolution space with a cost competitive product that sells in a diverse set of sectors.

To recap our pros for Omnivision:

  • Strong financial position
  • Market leader with highly competitive products

Let’s talk about some caveats.  

For one, although OmniVision’s gross margins have improved in the past years, and revenues have grown, that doesn’t always end up on the bottom line.

R&D has also shrunk as a portion of revenues, which is concerning given how the company touts its technological edge as a key differentiator and competitive advantage.

Analysts are also rumbling that competitors are beginning to steal market share from OmniVision. 

Other players in the CMOS space include Sony (NYSE: SNE), Aptina Imaging (which is an independent division of Micron (NASDAQ: MU)),Toshiba, STMicroelectronics (NYSE: STM), Samsung, and Sharp.  Those are some big names playing in OmniVision's sandbox.

Sony's CEO, Kazuo Hirai, stated recently that the company is going to accelerate its technological development and continue to find new markets for their CMOS chips.  Sony no doubt tastes the potential for CMOS chips after they recently became the CMOS supplier for the Apple iPhone 4S. Aptina did $570M in revenue in 2011 compared to OmniVision’s $956 million.  Aptina also has major inroads into the rapidly growing mobile phone market, and their solutions are present in one of three camera phones in the world. STMicroelectronics is shoveling a quarter of their employees and revenue into R&D and is the largest European semiconductor company to boot.  OmniVision’s R&D averaged about 10% for the last four quarters. 

The competition in the CMOS space is out there, and it is stiff.

Conclusion

OmniVision is still the world’s leading CMOS image solutions provider and is well situated in several markets that have good prospects for growth (particularly smart phones and tablets).  The demand for their products has been very high recently, and their strong sales demonstrate that they have not lost the ability to capture revenue from their markets, in spite of heavy competition.  Their financial position offsets some of the risk of earnings volatility, or diminishing growth.  Earnings are due to be reported on Feb. 23, and we’ll see if things are really as pessimistic as the analysts think they are. 

In honor of David Gardner's Moneyball series of articles calling for increased accountability (you should read it, it's an excellent idea), I have given OmniVision a thumbs up CAPScall.


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