This Apple Derivative Play is Back in Business
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One quarter back, I had told you about a stock, an Apple (NASDAQ: AAPL) derivative play, which was selling at a throwaway price at that time. The stock was beaten down massively after the Street focused more on its margin woes rather than its bright prospects.
One quarter later, the stock has added some 21% to investors’ wealth since my last post and looks set to do better. Ironically, the company again posted mixed results in the first quarter as its bottom line again fell short by a penny. But the market paid more attention to the sterling outlook this time and the stock avoided a crash like last time.
An intelligent investor would have bought into image sensor maker OmniVision Technologies (NASDAQ: OVTI) when it was trading at beaten down levels then. The Street’s myopia was on display when OmniVision had reported a decent fourth quarter in June but its bottom line outlook was off color. But the company’s top line has been doing pretty well of late, and is set to go up one level pretty soon, and this is where our focus should be.
Focus on the business, margins will follow
The company’s revenue has been on an upswing this year but the same hasn’t filtered below to the gross margin yet as OmniVision ramping up production of its low margin BSI-2 sensor. Although OmniVision has been seeing great demand for this sensor, it seems it is yet to attain the optimum cost of production for this sensor.
The production cost for the BSI sensor is high, constricting its margins, but it is a hit which I believe OmniVision can afford to take in the short term as the chip is finding great acceptance amongst customers. The high demand for OmniVision’s sensors is easily measurable by the outlook that the company has provided for the current quarter.
OmniVision expects revenue in the range of $355 million to $390 million, which is a light year ahead of the $270 million the Street expects. More importantly, the company expects earnings between 21 cents and 37 cents, which captures the consensus estimate of 33 cents in between. The bottom line projection is a departure from last time when OmniVision had said it will miss the estimate.
This tells us that the company is greatly focused on enhancing its margins. In addition, as OmniVision ramps up the production of its sensors, they would move lower on the cost curve and margins would get better in the process. And hence, our most important focus should be on OmniVision’s business which has been progressing very well.
Opportunities galore
The company makes image sensors for mobile devices such as smartphones, tablets, notebooks, cameras and others. And most importantly, the company supplies image sensors to none other than Apple for its iPhones and iPad. It seems that OmniVision is back in favor with Cupertino for image sensors after Apple had opted for Sony’s sensors in some of its iPhones last time. OmniVision had landed the sensor spot in the new iPad and going by its guidance, it seems it is back in the iPhone this time.
Also, OmniVision has seen the average selling price of its sensors rise of late and this bodes further well for its margins. If Apple’s next iPhone sales create new records, OmniVision can surely expect a massive boost.
In addition, OmniVision is witnessing huge opportunities in smartphones, both high end and feature phones. The company has a wide portfolio of products, ranging from VGA sensors to 16 megapixel ones and this enables it to satisfy a wide range of customers. Thus, OmniVision’s arsenal would enable it to cash in on the mobile computing revolution as its image sensors find application from smartphones to tablets to notebooks.
A similar story
Also, OmniVision’s return to the Apple fold suggests that it is ready for a breakout pretty soon. Its guidance is nothing less than stellar and with the impending iPhone launch the shares can go still higher. Moreover, OmniVision’s outlook follows that of another Apple play, Cirrus Logic (NASDAQ: CRUS). Cirrus had issued a scorching outlook a month back, which suggests that either it has gained content in the next iPhone or it is also supplying chips for another device; say an iPad mini (just a guess).
The bottom line
While OmniVision is currently in a soup as far as its gross margin is concerned, it is working towards improving them. While we might not see an overnight expansion, one should not forget that OmniVision is currently investing in equipment for making better sensors and it is seeing returns in the form of a rising top line. Its wide addressable market and presence of Apple on its client list are catalysts which couldn’t be ignored and these should lead OmniVision to perform better in the future.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.
