Why You Shouldn't Believe The Himax-Google Break-Up Rumor

| About: Himax Technologies, (HIMX)


Himax shares fell tremendously when rumors suggesting the loss of Google as a client emerged.

However, Himax expects its microdisplay business to bloom this year, which indicates that Google is going nowhere.

Himax's other business segments are doing well, and strong fundamentals mean that the stock could be a good buy.

Himax Technologies (NASDAQ:HIMX) is having a terrifying year. The company has lost 50% of its market cap in 2014 and the rumors regarding Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Glass, for which Himax is providing display chips, are not helping. After the company released a weak guidance for the second quarter earlier in May, there have been mixed views about where it is heading.

Rumors on the Street

However, Himax received a big blow and dropped 13.6% when rumors started emerging that Google is breaking up with Himax. According to TheStreet:

Himax Technologies plummeted today on whispers that the company is losing a main client.

Investors reacted to unconfirmed reports that Google will no longer use Himax's display chips in its Google Glass wearable computer. Shares of the semiconductor design company fell more than 14% intraday as investors debated whether to sell on the questionable news.

In addition, there was another piece of rumor that could hurt Himax. Again, as TheStreet reported:

Himax was falling -8.6% to $7.00 Tuesday following reports that Renesas Eletcronics plans to sell its stake in a unit that supplies display driver chips for the Apple iPhone.

Renesas will sell its stake to Synaptics, according to Reuters. The unit is the sole supplier to for display driver chips in the iPhone. Shares of Himax, which produces display integrated circuit products and offers LCD consulting, are falling following news of the sale.

These two instances of bad news have sent Himax shares plummeting. But, is this an opportunity for investors to take advantage of the rumors and buy more shares, or stay away from Himax? Let's find out.

Why investors should ignore the noise

Although Himax's performance in the first quarter wasn't quite strong, the company is focusing on product innovation and customer diversification strategies. Himax suffered significant downward adjustments from some of its key customers that led to a significant impact on its results and brought down its sales growth. But there might be respite for Himax going forward.

The company is seeing strong growth in the large panel IC segment on the back of new customers that are leading to higher TV sales in China. However, this is a competitive and mature market. So, Himax is focusing on innovation to continue pursuing new technologies and growth opportunities to strengthen its large panel driver IC business. According to management, this segment has a bright outlook for 2014 and beyond.

The other segment in its driver business makes ICs used in small and medium-sized panels for applications including smartphones, tablets, automotive applications, and smartphones. The company could see strong growth here on the back of strong smartphone growth in China.

Himax is seeing strong momentum in China that's expected to carry over strongly into the second half of the year as 4G LTE adoption and resolution upgrades to HD go mainstream. Himax's customer base in China is highly diversified, with not even one end-customer being 10% or more of its driver IC sales in smartphones.

Small and medium-sized panel ICs are also being used in tablets and automotive displays. As a market leader in the tablet display market, Himax is getting business from globally-branded customers, which are new entrants to its customer list for tablet sales.

Non-driver prospects remain strong

However, the most exciting long-term growth prospect for Himax is its non-driver business, which is the key differentiator for it as compared to many of its competitors. Its expertise in image processing and human interface-related technologies, coupled with its driver IC products, make Himax a comprehensive solution provider to its customers.

Many of its non-driver products, including the CMOS image sensor, touch panel controller, power management IC, and ASIC service are set to grow significantly in the second quarter, according to management. The non-driver business category is expected to grow in double-digits in the second quarter, and this momentum is expected to continue throughout 2014 and beyond.

Himax's CMOS image sensors delivered strong sales growth in Q1, up close to 30% sequentially. Its existing 2 and 5 megapixel CMOS image sensors are producing good sales from select international brands and Chinese white-box customers.

The 8 megapixel sensors of Himax are expected to start shipments later this year, which is believed to contribute to significant sales growth and better gross margins in the second half of the year. Additionally, following multi-year design efforts, it now has a competitive CMOS image sensor product line for the automotive and surveillance markets, which are large, lucrative, and fast-growing markets. This market segment has a high entry barrier as special know-how is required. Collectively, the CMOS image sensor business is expected to more than double in 2014.

Don't count Google out yet

Himax says that its LCOS microdisplay business is doing well. It continues to work with multiple customers, including well-known names, on multiple designs simultaneously, many of which involve custom-built designs that are funded by its customers' development fees. It's also working with some new top-tier customers focusing aggressively on head-mounted technology product development. The LCOS microdisplay business still remains the most exciting and significant long-term growth area for Himax, according to management.

Thus, investors shouldn't believe rumors and instead focus on what management is saying. The company believes that its LCOS microdisplay business will boom going forward, and this wouldn't be possible without the presence of Google as a customer. Also, Google had invested in Himax last year, so it is difficult to see why it might suddenly think of breaking away from it.


Finally, Himax's valuation is also quite attractive. It has a trailing P/E of 18 and a forward P/E of 11. This indicates earnings growth for Himax going forward. Also, its earnings are expected to grow at a CAGR of 39.30% for the next 5 years, which is much higher than the industry's average of 15.34%. So, investors should ignore the noise on Wall Street and focus on Himax's fundamentals and market opportunities.

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.