The display driver business is one of the important businesses for Himax Technologies (HIMX), and despite its diversified product line, the company is highly dependent on the thin film transistors liquid crystal display, or TFT-LCD, panels display drivers, which contributed 86% of its total revenue in 2012. Himax's non-display driver products feature digital camera solutions including CMOS image sensors, liquid crystal on silicon, or LCOS, microdisplays used in head mounted displays, touch panel controllers, etc.
The non-display driver segment is expected to be the catalyst for revenue in the long run, as the TFT-LCD panel market is currently experiencing a slowdown due to weak demand for large sized display panels used in TVs, notebooks, etc. During the third quarter of 2013, the large panel display drivers' revenue was down 24.7% year over year, while its contribution towards total revenue declined to 29.9% from 40.2% in the third quarter of 2012. The only positive point in its display driver business was that revenue from small and medium sized display panel drivers continued its good run due to positive global demand for mobile devices. Revenue from selling small and medium sized display drivers was up 15.1% year over year, while its contribution towards total revenue was 52.1%, up from 45.8% in the third quarter of 2012.
The company's non-display driver business continued its robust growth with revenue rising 30.5% year over year in the third quarter. Although the revenue contribution of the non-driver display segment was limited to 18% in the third quarter, I believe the company has a lot of market opportunity due to a surge in demand of products like CMOS image sensors, LCOS Microdisplays, touch panel controllers, etc.
Himax's CMOS image sensors, part of its non-display driver segment, also reported strong third-quarter shipments. This was the biggest contributor in the non-display driver product group. This growth was supported by a rise in the shipments of Himax's 1 mega-pixel, or MP, sensor for tier-one laptop customers and growing demand for its 2MP and 5MP sensors from smartphone and tablet makers. Himax will launch an 8MP sensor this quarter to target higher-end smartphone and tablet markets. This segment is the fastest growing product of CMOS image sensors, with more than 8MP image sensors expected to grow at a CAGR of 41.1% from 2012-2016. This is more than the overall market growth CAGR of 13.8%. I think it will receive more design wins from the smartphone and tablet segment in the coming years.
Himax has a strong customer base including Lenovo (OTCPK:LNVGY), Hewlett-Packard (HPQ), Sony (SNE), etc. for its CMOS image sensors. Himax has a good presence in the laptop segment, with lights for top players like Lenovo and HP providing growth to the CMOS image sensor shipments. Lenovo is the leading player in the overall PC market with 17.6% market share worldwide in the third quarter of 2013, and HP is the second biggest player with a market share of 17.1%. Both companies are trying to increase their presence in the tablet segment, a market that is dominated by Samsung (GM:SSNLF) and Apple (AAPL). Lenovo is the fourth biggest player in the tablet market with a 4.8% market share in third-quarter 2013 shipments, while HP, which lost its market leadership position in PC to Lenovo in the second quarter of this year, has been slow to react to the tablet market. HP's presence in tablets is at a nascent stage, but the company is trying to increase its presence by expanding its tablet product portfolio.
Himax's customer base in CMOS image sensors is quite strong, and therefore I believe the company can see this business as one of its revenue growth drivers.
How Google's investment will support Himax's topline
One of the biggest contributions towards growth from the non-display driver business will come from LCOS Microdisplays. The company received a major boost after it signed an investment agreement with Google (GOOG) in July this year. The agreement included the purchase of preferred shares by Google in Himax's subsidiary, Himax Display Inc., or HDI, which manufacturers LCOS Microdisplays. The proceeds from the investment will be used to fund capacity expansion of HDI. During its third quarter, the company discussed its capacity expansion plan, and it expects that LCOS Microdisplays capacity will increase from 200,000 panels a month to 2 million panels a month by 2014.
Google investment in HDI and capacity expansion of head mounted displays, lead to speculation that Google will use Himax glass in its Google glass project, which is expected to commercially launch next year. Although there was no official announcement from either company, Himax Technologies announced that it has received a contract from a top-tier customer for its LCOS Microdisplay business. Google has currently released "Explorer Editions" of Google Glass, with 10,000 units distributed to developers. Google Glass is a pair of wearable computer glasses with a mount head display developed under Project Glass. Google Glass sales are expected to be more than 21 million units by 2018. At an average price of $500, Google has a chance to earn $10.5 billion in annual revenue from Glass by 2018. In addition to this, Google's current Explorer Editions program will help develop apps to attract more users.
Google has been an important partner for Himax Technologies, and therefore its investment in expanding the facility of LCOS Microdisplay indicates that Google is trying to ramp up production to support the massive commercial launch of Google Glass next year. Despite no official announcement, I believe Himax Technologies will be an important component supplier for Google Glass.
Himax Technologies' large display driver might be affecting the company's top-line growth due to weak market demand, but its non-display driver business will help offset this negative impact. The overall valuation metric of Himax looks strong, supporting a long-term revenue growth. Himax Technologies' trailing twelve month P/E is currently trading at 29.66, while it's forward P/E for the year ending Dec. 31, 2014 is at 17.30. This difference denotes a rise in the company's earnings. In addition to this, it has a PEG ratio 0.87 for the next five years, which indicates that the company is undervalued and has an upside potential. Therefore, with the mega launch of Google Glass and strong valuation support, I recommend buying this stock.