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Summary

  • OmniVision Technologies' camera sensors are finding solid adoption across the globe.
  • OmniVision's new products should help it gain more traction in end markets such as wearables, gesture control, motion detection, and smartphones.
  • OmniVision's valuation is impressive despite its solid run, and its earnings are expected to increase at a fast pace.

Back in March, Apple (NASDAQ:AAPL) supplier OmniVision Technologies (NASDAQ:OVTI) looked like a value play. The company looked well placed to benefit from the growing smartphone market in China, while the fact that it supplies image sensors to Apple is another advantage. So far this year, OmniVision shares have gained close to 32%, driven by a couple of solid quarterly reports. But, the good thing is that despite its rise, OmniVision is still a value play.

Let's look at OmniVision's prospects and see why it is still a solid long-term pick.

What's driving growth?

OmniVision posted better-than-expected fourth-quarter results. Although the company witnessed a slowdown in the North American core smartphone market, healthy growth from Asia-based OEMs, especially in China and Taiwan, helped OmniVision outperform consensus estimates handsomely. In addition, its automotive and security businesses are also growing robustly.

The goal of OmniVision has always been to drive profitable revenue growth from diversified applications, products, and markets, leveraging its core technology. Looking ahead, OmniVision will continue to enhance its technology leadership, expand its market opportunity by developing new products and applications based on its technology, and optimization of its cost structure in order to achieve its goal.

The company's management is focused on innovation, and is enhancing the development of its core process technology, along with complimentary imaging solutions technologies. Innovation is the basis on which OmniVision can manufacture better performance products, and meet demand of its key target markets.

Innovation and China are driving growth

OmniVision's new flagship is its PureCel technology. PureCel is a cost-optimized technology for the volume smartphone and tablet markets, with leading industry performance, light sensitivity, and low power. As such, OmniVision expects PureCel sensor volume to widen and deepen its ability to address both core and emerging markets.

Additionally, OmniVision's core technical team is constantly enhancing and developing corresponding imaging solution technologies such as high dynamic range. The company believes that its focus on new technologies will lay a solid foundation for it to address opportunities in the mobile device market.

OmniVision is well-positioned to benefit from the globalization of the smartphone and tablet market with its broad footprint, long history, and healthy relationships with baseband partners, module manufacturers, and OEMs, particularly in Asia. According to analysts, smartphone growth is expected to be primarily driven by the increase in sales of low-cost 3G smartphones, coupled with the transition to 4G/LTE in China.

The Chinese smartphone market is a big opportunity for OmniVision. As reported by phonearena.com:

"According to iSuppli, the number of 4G phones shipped to China is expected to soar from 4.6 million units in 2013 to 72.6 million this year, 144 million in 2015, 220 million in 2016, and 300 million in 2017. China Mobile is a lot more optimistic. The operator expects shipments of 4G handsets in the country to reach 200 million this year. Industry watchers expect 100 million of China Mobile's 900 million subscribers to switch to a 4G plan in 2014."

To tap this opportunity, OmniVision is working closely with customers to develop new applications such as capturing 3-D depth information, using photography to improve image quality, and shift towards higher resolutions. The company is also developing new human interface applications with machine vision.

Products gaining traction

Additionally, OmniVision has developed ASIC that matches its automotive sensors to introduce distortion correction and improve light sensitivity. The company has also witnessed robust growth in its security business, driven by the rise of self-installed low cost IP cameras and geographic diversification into countries such as China.

There's a shift in the trend toward higher resolution cameras. This is verified by the fact that unit sales of sensors 2-megapixel and above represented approximately 52% of total shipments in the fourth quarter, as compared to 44% in the prior quarter. The growth was primarily driven by increased 13-, 8-, and 4-megapixel shipments.

OmniVision is also shipping an increasing volume of its high-performance sensors in several resolution categories, ranging from HD up to the 13- megapixel PureCel product in Taiwan. The gaming console segment has also remained strong, with strong volume of 720p sensor products shipped to a major Japanese OEM.

OmniVision is also successfully transitioning OEMs to its new OV9728 720p sensor from its legacy 720p sensor. Also, it has shipped a higher volume of VGA sensors for the notebook market to meet the increasing VGA demand in notebooks.

The newly announced sensor targeted machine vision of OmniVision, called OV6211, is an extremely low-power sensor running at 120 frames per second in a global shutter mode, which allows it to be designed for applications such as hands-free gesture control, eye tracking, depth and motion detection, and biometrics. Hence, the company has effectively expanded its total addressable market with one chip.

Impressive valuation

OmniVision trades at a trailing P/E ratio of just 13. Considering that its earnings are expected to grow at a CAGR of 12% over the next five years, the stock looks cheap. Additionally, OmniVision has a debt of just $38 million, while it has cash of $452 million. Moreover, a current ratio of 4.40 indicates strong liquidity. So, the company has a strong balance sheet, which will allow it to pursue its product innovation and expansion moves.

Finally, OmniVision should also benefit from Apple's upcoming iPhone 6. It has supplied its image sensors to Apple for a long time, including for the iPhone 5s. With a product refresh at Apple in the cards, the company should see an increase in revenue going forward. So, even after a solid run up in 2014, OmniVision looks like a solid bet at its current valuation.

Source: OmniVision Technologies Can Soar To New Highs