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"Erratic" barely begins to describe the last six days that imaging chip supplier Omnivision (OVTI) has experienced.

  • The stock established a new 52-week low of $10.40 on Friday the 25th.
  • On Monday the 28th, shares rallied 12.58% behind bullish Black Friday energy and Q3 optimism ahead of the Tuesday earnings report.
  • On Tuesday, the price erased nearly half of Monday's gains falling 4.52% ahead of the earnings release.
  • After the earnings report provided what analysts deemed to be disappointing Q3 revenue projections coupled with Q2 figures that did not exceed expectations, the stock dove an additional 11.53% in after hours trading. It now sits below $10.00 for the first time since the 2008 crash at a new 52 week low of $9.90.

Before outlining the results of the Q2 report Tuesday evening, let's first take a look back at some of the catalysts influencing today's stock price.

1. Shady Executive Transparency About Their Faltering Relationship With Apple

Rumors first surfaced in late summer that OmniVision could lose their relationship with Apple (AAPL) as the chief supplier of both of the camera chips on the iPhone 4s. The stock promptly lost half of its value and hovered around $16.00 a share from September until early November. Later in the year in October, the stock again posted a modest rally ahead of the iPhone 4s release date, but was then once again depressed thanks to the post-release Chipworks teardown that revealed that Sony (SNE) had indeed obtained at least some of the contract for the camera sensors in the iPhone 4s.

Amidst all of this, CEO Shaw Hong maintained his policy of not commenting on the Apple contract situation. The policy has mired the company in dozens of class-action lawsuits complaining that the executives misled investors about the relationship with Apple. This has contributed to what is currently a toxic shareholder-executive relationship.

2. Reduced 2nd Quarter 2012 Revenue Guidance

Omnivision changed its net revenue forecast for the second quarter of 2012 to be in the range of $212 million to $217 million. This was significantly lower than the revenues forecast of $255 million to $275 million announced August 25, 2011. The downward revision was attributed to a cutback in orders for certain key projects that are currently in production such as Omni BSI and OmniPixel3-HS based products. This sent the stock diving to its value on Friday, November 25th of $10.40.

3. The January Effect
At the end of the year, individual investors frequently dump underperforming stocks such as OVTI in order to claim a capital loss on their tax returns. This is known as the January effect, and is a market trend that was first identified in 1942 by investment banker Sidney B. Wachtel. The reason that it is called the January effect is that investors typically reinvest the funds received from the sale of underperforming small and mid cap stocks in the month of January, leading to a resurgence of the artificially deflated prices. This tax-conscious sell off of the seriously underperforming OmniVision is a contributing factor to the low share price.

Tuesday's Q2 Fiscal Year 2012 Revenue Report and Projections for Q3

As reported on Tuesday the 29th, revenues for the second quarter of fiscal 2012 were $217.9 million; significantly lower than $276.1 million in the first quarter of fiscal 2012, and $239.5 million in the second quarter of fiscal 2011. This was largely in line with the adjusted expectations that the company announced when they reduced their Q2 revenue guidance. The real blow to the stock price came from the Q3 outlook. The company expects fiscal third quarter 2012 revenues will be in the range of $160 million to $180 million. This is an indication that the company may have lost more key contracts than merely the originally feared Apple iPhone 4s contract.

While some may point to the reduced revenue as a result of supply problems from the Thailand flooding, this is simply not the case as the company mentioned in its Tuesday conference call that one of their problems is excess inventory. In fact, the excess inventory pileup also struck at the cash stockpile of Omnivision which had previously been considered one of the company's greatest strengths. The company ended the period with cash, cash equivalents and short-term investments totaling $464.8 million. This was a decrease of $41.3 million from the previous quarter. The decrease was officially attributed to "a significant increase in inventory balance, brought about by an unexpected cutback in customer orders during the second quarter."

However, despite the glum outlook, there are still positive drivers that indicate a potential resurgence in share price.

1. First and foremost, the company is trading at a price-to-book and a P/E that are well below both industry and sector averages. The P/E of $4.71 is well below the industry average of $10.55 and is also below the previous five year low of $13.50. The price to book ratio is below 1 at .86 and is below the industry average of $1.18. Both of these metrics may be indicative of a company that is underperforming the industry, but in my opinion they are signals that there is still some unrealized value in the company at the current share price.

2. While they took a hit this most recent quarter, Omnivision is still cash rich with $464 million of net cash currently on their balance sheet. They are also unhindered by long term debt with less than $50 million reported on the balance sheet. This, coupled with the fact that the company has announced a $100 million buyback program, gives the stock ample room to rise aided by increased demand from the corporation itself.

3. The company has 79% institutional ownership. This means that no matter how much investors think that they want the share price to return to its early 2011 glory days, odds are that employees want it even more.

There are two roads from here for OVTI. Option one is that they continue to innovate behind schedule, bleed contracts, and pump their cash reserves into a buyback of a faltering stock. Alternatively, they can regain their momentum by both demonstrating that they can thrive as a separate beast from Apple, while using their high cash levels and low debt load to develop chips that can compete at the forefront of the competitive sensor market.

Source: OmniVision - Q3 Outlook Disappointment And The Road Ahead