Shares of Google (GOOG, GOOGL) Glass supplier Himax Technologies (NASDAQ:HIMX) have taken a massive beating this year. The stock is down close to 40%, and the stock suffered after Northland Capital Markets analyst Tom Sepenzis lowered his price target from $20 to $15 on the stock, according to Barron's. Sepenzis cited that a large South Korean customer has pulled display driver orders from Himax for the rest of 2014, and this could lead to a revenue loss in the range of $50 million to $60 million this year. This would be a big blow for Himax, as it would take out close to 8% of the $770 million in revenue that it had earned in the last twelve months.
Himax is counting big on Google to drive its results in the long run, but the company is mired in short-term weakness. Himax pre-announced its first-quarter revenue and gross margin in mid-April, ahead of the May 8 earnings date. Investors don't seem to be particularly impressed, as Himax shares are down more than 2% since it made the announcement.
In the first quarter, Himax brought in $194.6 million in revenue, an increase of 10.8% year-over-year, and almost in line with the company's own expectations. However, the question is, can Himax execute a turnaround going forward? Or investors should consider selling the stock? Let's try and find out.
Counting on smartphones and TVs
Himax is counting on strong sales in smartphone and tablet applications in the Chinese and the Korean markets. The company is also focusing on operational efficiencies, and is expecting steady growth across its different segments going forward.
Smartphones and tablets should be a key growth driver for Himax. There would be no better opportunity to benefit from mobile devices than China, as it is one of the largest and fastest-growing markets in the world. The company claims to be among the leading suppliers to panel makers across Taiwan, Korea, China and Japan. In this way, Himax is covering a vast majority of leading smartphone end-customers in both China and the international markets.
It produces drivers for small and medium-size applications for tier 1 international customers and the fast-growing Chinese white-box market that has gained popularity of late. Further, the fast-growing 4G LTE platform across the world, including China, can also open up opportunities for Himax.
However, Himax is seeing weakness in the large panel display drivers business. Revenue from this segment was down 25% year-over-year in 2013, representing 29.7% of its total sales, as compared to 41.4% in 2012.
Himax expects a turnaround in this business on the back of 4K TVs. The company is focusing on product innovation in large panel drivers for 4K TVs. The 4K TV market can be a big growth driver for Himax. According to NPD, by the end of 2013, the number of commercial 4K TVs shipped globally were around 1.9 million. This year, the number is expected to shoot up to 12.7 million.
The Google Glass factor
Moving on, Himax is also expecting growth in non-driver products. This includes LCOS micro-displays. Himax is expecting sales of LCOS micro display drivers to take off, since the company is a supplier for Google Glass. Last year, Seeking Alpha author Mark Gomes revealed that Himax will be supplying LCOS microdisplays for the Google Glass. This turned out to be true when Google bought a 6.3% stake in Himax.
This investment is expected to help Himax expand its production capacity to mass-produce LCOS microdisplays for the Glass, and Google can buy another 8.5% worth of stake in Himax if it is impressed by the chipmaker's moves. Hence, it can be seen that Himax is in a prime position to ride the Google Glass wave.
Google has recently made some good moves to spur adoption of the Google Glass, such as entering into a partnership with Luxottica (NYSE:LUX) to distribute the device. Google and Luxottica are joining forces to design, develop, and distribute a new breed of eyewear for Glass. Both companies are trying to make Glass more stylish so that it isn't seen as a product for the geeks, and instead considered a style statement. Luxottica is the world's largest producer of sunglasses, and it will include famous brands such as Oakley and Ray-Ban in this project to push up adoption of Google Glass.
So, in the long run, Himax could turn out to be a good investment. But right now, investors need to be cautious.
Don't ignore these concerns
If what Northland Capital Markets is saying is right, Himax's revenue and earnings growth will be pressured. The loss of $50 million to $60 million in annual revenue would take out some momentum from Himax's growth. Moreover, Google Glass is still some time away, and at the same time, the large panel driver business has been under pressure of late. As such, there might be some downside in store for shares of Himax until and unless the company's growth catalysts arrive.
Moreover, Himax is presently trading at a trailing P/E of 25, which is an indication that it is expensive right now relative to its growth. So, coupled with an expensive valuation and near-term uncertainty in the business, Himax shares might go down further.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.