OmniVision Technologies: WLCSP Stake A Significant Boost To Book Value

OmniVision Technologies, Inc. (NASDAQ:OVTI) long-term investment in Wafer Level Chip Scale Package Ltd. (WLCSP) bore fruit when WLCSP went IPO in February. This has significantly increased OVTI's book value, resulting in OVTI trading at price/tangible book ratio of 0.8. This article will focus on the financial aspects of OVTI and argue why the current valuation makes it a compelling buy.

OmniVision Technologies, Inc. engages in designing, developing, and marketing semiconductor image-sensor devices worldwide. It is a leader in CMOS image-sensor market, and has a comprehensive portfolio across various resolutions. It gets revenue from 4 main segments: (1) Mobile Phones (2) Entertainment which includes tablets, games/toys etc. (3) Notebook/PC (4) Emerging which includes automotive, security/surveillance, medical. The revenue distribution as of October 31, 2013 is as follows:

  • Mobile Phones: 60%

  • Entertainment: 25%

  • Emerging: 10%

  • Notebook/PC: 5%

It enjoys more than 25% market share in mobile phones and automotive, more than 33% market-share in medical and security, and more than 50% market share in entertainment and notebook/pc. It does have quite a few competitors in Sony (NYSE:SNE), Micron's (NASDAQ:MU) spin-off Aptina, Samsung, Canon(NYSE:CAJ), and Himax (NASDAQ:HIMX). Apple (NASDAQ:AAPL) is one of its well known customers, though Sony is trying hard to displace it.

Given a good understanding of what OVTI does and where its revenue comes from, let me turn to financials and argue why it is a strong buy.

Long-term investments

OVTI's long term investments totaled $145.6 million as of October 31, 2013. They were spread across the following companies:

  • VisEra: $ 115.6 million

  • Wafer Level Chip Scale Package Ltd. (WLCSP): $25.3 million

  • XinTec: $4.7 million

The most significant out of these investments is WLCSP. As of October 31, 2013, OVTI owned 18.7% of WLCSP. WLCSP went IPO on February 10, 2014 in China at a valuation of $780 million, and raised $118 million (15% of market capitalization). As of February 20, 2014, the market capitalization for WLCSP is $1680 million (10, 219 RMB). If OVTI did not sell any of its holdings in the IPO, using a 15% dilution from the IPO, the current stake of OVTI will come to around 15.9%. This equates to $267 million or $4.7/share (total outstanding shares for OVTI being 56 million). OVTI will probably realize this mark-to-market gain in its quarter ending in April, 2014. Cumulatively, the long-term investments will swell to $387.3 million or $6.91/share.

Trading below book value

Looking at OVTI's balance sheet (ending in October 31, 2013), its total assets equal $1239 million and total liabilities equal $321 million, giving it a book value of $918 million (total assets - total liabilities). At the time of writing this article, OVTI was trading at $15.38 giving it a market capitalization of $860 million. Therefore:

  • price/book = 860/918 = 0.94.

In its total assets, OVTI includes Goodwill and Intangible assets totaling $61 million. Therefore, tangible book value is $857 million which gives

  • price/tangible book = 860/857 = 1.0

However, this price/tangible book ratio is not accurate since one of OVTI's long-term investments has significantly increased in value as explained previously. Taking into account the increase in value of WLCSP stake (approximately $243 million):

  • price/tangible book = 860/1100 = 0.78

For a technology company, which has seen positive profit margin since the past 17 quarters, this valuation does not make sense.

Cash and short-term investments

OVTI's cash and short-term investments equal $265.6 million with total debt being $39 million. This results in net cash and short-term investments of $226.6 million which equates to more than $4/share.

Improving gross margins

The gross margins for OVTI have steadily increased in the past 5 quarters from 16.58% in quarter ending in October, 2012 to 18.85% in quarter ending in October, 2013. The management has also stated about further increase in gross margins.

In summary, a significant increase in the value of OVTI's long-term investment in WLCSP has resulted in OVTI trading at a significant discount to its book value. Together, with its net cash and short-term investments of $4/share, and improving gross margins, OVTI must be a no-brainer for anyone looking for an undervalued technology stock. I see a minimum gain of 15-20% gain from the current price of $15.38.

Disclosure: I am long OVTI, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.