What a year it has been for Himax Technologies (HIMX)! The stock has gained a phenomenal 370% year-to-date as investors have bid up the stock in anticipation of Himax enjoying windfall gains from the Google (GOOG) Glass. Ever since Seeking Alpha author Mark Gomes' investigation revealed that Himax would be supplying a key component for the Google Glass, shares have tripled.
Moreover, Google itself has bought a 6.3% stake in Himax's display business so that it can fund the production of chips and modules that are about to be used in the device. With Google Glass slated for a mass release next year, these are exciting times to be a Himax investor. However, with Himax trading at a trailing P/E of 32 and growth having slowed down of late, it doesn't make sense to buy the stock any more.
Himax had done well even before its relationship with Google came into the spotlight, but now it seems that the stock is driven more by hype that by the company's fundamentals. As a result, it wasn't surprising to see Himax shares fall 12% in mid-August after the company reported its second-quarter results.
Himax's revenue was up just 9% to $207 million and missed consensus estimates, and the company's EPS of $0.11 a share was also behind estimates. However, shares have resumed their upward trajectory even after such a report as investors focus on its Google Glass prospects. Valuations are now stretched and, in my opinion, Himax shares look worth shorting due to the following reasons.
Weakness in core businesses
Large panel display drivers accounted for around 30% of Himax's revenue in the second quarter, a substantial decline from 42% in the prior-year period. Reduced sales to Innolux, which sold-off its equity stake in Himax, and weak demand for televisions and laptops led to a drop in this segment's performance. Moreover, the Chinese government ended its TV subsidy program in May, affecting sales of TVs along with display makers such as Himax in the process.
But then, Himax expects a slight improvement in this business in the future, driven by orders from panel makers in Korea and Taiwan. The company possibly sells its display drivers to the likes of Samsung and other TV manufacturers, which looks like a bad sign for the short-term.
Samsung launched its first OLED TVs in June. The Korean giant has experienced production issues that have resulted in defective TVs and higher costs. As a result, these TVs were priced at a whopping $13,000 for the 55-inch curved OLED. In addition, analysts such as Chung Won-suk of HI Investment & Securities are estimating a slow pickup in sales of OLED TV and expect that it will take around two years before OLEDs are adopted on a wider scale by customers.
In addition, DisplaySearch expects that 600,000 OLED TVs will be sold next year. Sales are expected to jump to a more impressive 7 million in 2016. Hence, it is not surprising to see Himax enhancing its panel production capacity to satisfy this increased demand going forward.
For investors, this essentially means that a major chunk of the company's business will be facing short-term weakness. Growth will probably be subdued until sales of TVs pick up and as a result, Himax's growth might not be enough to support its rich valuation. However, over the long run, prospects look better going by analyst estimates when sales of TVs pick up.
More short-term pain
Himax has been witnessing rapid growth in display drivers for small/medium-sized panels, driven by smartphones and tablets. This business contributed around 54% to its top line in the second quarter and grew 32% from the prior-year period. Growth in sales of mobile devices and automotive displays has propelled this business higher in recent times.
However, Himax management expects some short-term pain in this business as well. A switch by Chinese smartphone manufacturers to updated models and inventory corrections were headwinds in the previous quarter. Himax also expects margin pressure, and also fears a loss in market share, due to price wars in budget smartphones.
Glass is just a sidekick now
Himax's non-driver products segment accounted for 15% of total revenue in the second quarter. This segment's growth was slower than the small and medium-sized display drivers business. However, this is the segment in the spotlight because it manufactures LCOS microdisplays that are slated to be used in the Google Glass.
Moreover, it should also be noted that in display drivers, CMOS image sensors are the best performers now and account for the majority of the segment's revenue.
Strong demand for 2 megapixel and 5 megapixel camera sensors from smartphone and tablet manufacturers in China and abroad has helped the growth of this segment. Recently, Himax also launched an 8 megapixel camera sensor as well. The company expects growth from new smartphone clients this year, leading to brisk growth in sales of CMOS image sensors.
Glass' success is not guaranteed
It isn't a good idea to expect Google Glass to take Himax's revenue to the next level as the product's credentials haven't been established yet. Business Insider expects Google Glass to become an $11 billion market by 2018, which seems possible if the device is priced at a reasonable $299 at launch as rumored. However, there are certain negatives about Google Glass that cannot be ignored.
The threat of cheaper competitors is always there while valid concerns have been raised about privacy, low battery life, and strain on the eyes as a result of using Google Glass. Hence, expecting a product that isn't sold on a broader scale yet isn't a good idea. Google Glass could be an important driver for Himax if it turns out to be successful. However, as of now, laptops, TVs, monitors, smartphones, tablets, automotive displays, etc. are the bread and butter of Himax.
A short candidate
Himax management said on the last conference call that there is "relatively poor visibility" in the end markets. But shares have continued to appreciate as investors focus on the Google Glass hype. Investors need to pay attention to the bigger business segments of Himax instead of counting on Google Glass. Price wars in smartphone chips and a decline in the large display driver business are headwinds that the company is facing.
Revenue growth was quite slow in the previous quarter and it won't be surprising to see more downside from Himax as it trades at a stretched P/E valuation. The industry's average P/E is 17.18, almost double of where Himax trades. Hence, it won't be surprising to see a correction taking place in the future.