On February 27, Google (GOOG) co-founder Sergey Brin publicly moved up the timeline for Google Glass from 2014 to later this year. In doing so, Brin also moved up the timeline for component suppliers that have been waiting for a killer app to take their industry by storm.
It appears they have their wish…and Himax (HIMX) looks to be the first vendor to benefit.
Originally dubbed Project Glass, Google created a major buzz last year with a video depicting what a typical day might look like with its revolutionary glasses. On Wednesday, Brin wowed the audience at the TED 2013 conference by demonstrating Google Glass in live action. He put an exclamation point on the event by announcing that the augmented-reality glasses will be available in time for the holidays.
Based on evidence gathered by me and my team at Pipeline Data, we strongly believe that Himax will be GOOG's primary provider of microdisplays, the key component that allows users to view computer-generated data on their glasses.
Our confidence stems from commentary from HIMX's management team, along with new publicly available footage, which depicts the components Google has been using in its development process.
Addressing the first point, on HIMX's latest earnings call, CEO Jordan Wu stated, "Also adding to (our) growth were our pilot shipments of LCOS microdisplays for the new and exciting head-mounted display application." In subsequent discussions with Himax, we asked about its availability of transmissive color-filter LCOS chips for head-mounted displays such as Google's. While careful not to acknowledge any specific customer dealings, Himax was quick to point out it is the only vendor that has publicly announced having such devices available for such head-mounted displays.
HIMX has also publicly stated on its earnings call that multiple "large U.S. software companies" have been in discussions with the company for some time now. Last but not least, HIMX shipped 20,000 chips in Q4. Interesting timing, considering the subsequent introduction of Google Glass last week.
Despite the plethora of evidence, HIMX has resisted multiple attempts to reveal its customer for the "new and exciting head-mounted display application," doubtless due to an NDA. However, Google Glass is clearly the most exciting display application on the horizon…and here's where it gets interesting.
On February 22, Joshua Topolsky, Editor-in-chief of The Verge, shared an inside look at Google Glass, including in-depth video footage. 90 seconds into that footage, we get a great look at an early prototype of Google Glass. The prototype has several components hanging by its wires, including its key component, the microdisplay.
After an extensive search, we found a smoking gun, courtesy of Karl Guttag. Guttag was the former CTO of Syndiant (a Himax competitor) and the inventor on well over 100 patents in this field. Guttag inspected photos of Google Glass and found the panel to be a perfect match with a panel last seen at a Hong Kong Electronics Fair. The maker? Himax.
The technology behind these microdisplays is known as LCOS (liquid crystal on silicon). According to Gartner Group, there are many use-cases for LCOS. Many of these uses appear to be crossing the chasm, according to Gartner's proprietary "Hype Cycle" methodology. Personally, I have seen videos for its utilization in video games, ski goggles, automotive heads-up displays (HUDs), point-of-view (POV) videos, etc.
In short, there are many potential killer apps that are likely to emerge in the coming year, thanks to technological advancements, economies of cost, and motivated tech giants. As a result, Google is just the tip of the iceberg.
Of course, there is competition, but we found no evidence that any of them are working with Google on Glass. In addition, HIMX has nearly 1500 patents with a particular advantage in mobile applications. Thus, with the market on the verge of reaching critical mass, we believe that several microdisplay vendors will flourish, starting with HIMX.
Specific to Google Glass, a successful launch can be expected to yield at least a couple million units in its inaugural holiday season. A microdisplay can be expected to fetch on the order of $20 per unit. Therefore, HIMX is likely sitting on a nice catalyst for 2013 revenue upside, along with exponential growth in 2014 (since 2013 will only contain a few weeks/months revenue).
Beyond this holiday season, we can expect the competition to scramble in reaction to Glass, further accelerating demand for HIMX's displays. We cover this in further depth in the Seeking Alpha article "Google Launches The Glass War: Winners And Losers Abound".
Thus, it appears that HIMX, as a key arms merchant in this war, stands to be a big winner sooner and to a greater extent than Wall Street has previously expected.
This will surely be a topic of discussion at a Bank of America/Merrill Lynch Investor Conference, which will be held next Tuesday through Thursday, March 12-14. HIMX will be hosting 1-on-1 meetings with investors during all three days of that event.
Thanks to investors' underestimation of GOOG's launch date, HIMX shares are still trading at a remarkably low valuation. The stock trades for a mere $3.44 as of this writing, and a third of its valuation is represented by cash on its balance sheet. That gives HIMX an enterprise value of around $2.25 per share.
This compares very favorably against Wall Street estimates, which currently call for $830M in revenue and 37 cents in EPS. It compares even more favorably against 2014 estimates, which call for 28% revenue growth and a rise in EPS to 42 cents. Doing the math, HIMX's enterprise value is a mere 5 times 2014 EPS estimates, and just 0.4 times 2014 revenue.
These sentiments are echoed in HIMX's latest investor presentation. In it, the company outlines its "strong smartphone and tablet growth momentum," along with its "substantial business opportunities from non-drivers, including CMOS image sensor, touch panel controller, and LCOS micro display." It highlights a "focus in mobile devices with great growth potential" and its "low P/E compared to peers."
Keep in mind, the Street estimates don't account for Google Glass (or any other major glass offering), so there is ample reason to expect estimates to be ratcheted up for Q4 and 2014.
Even a modest increase will justify multiple expansion to match its 28% growth expectations. The impact on HIMX's share price would be dramatic. For example, a 25 P/E on current 2014 estimates gets us over $10 per share. Add back the cash, and we're approaching $12. If Glass takes off with HIMX on board, we believe that estimates could easily top 60 cents, in which case, a P/E of 15 would be sufficient to produce a 200% return.
The company still needs to execute, and Google still needs to have a successful launch. That being said, if things go smoothly, HIMX shares should experience a steady ramp as the year progresses. Accordingly, we believe that shares of Himax are poised to triple.