Apple (NASDAQ:AAPL) supplier OmniVision Technologies (NASDAQ:OVTI) posted solid results in the recently reported third quarter, ending its streak of disappointments. In addition, OmniVision issued an outstanding outlook for the ongoing quarter, sending its shares higher. But, can OmniVision continue to outperform in the future? Let's find out.
OmniVision's positioning in Asia, especially China, is driving its business. There was a sequential improvement in its financial metrics during the previous quarter, including high gross margins, increased cash balance, and lower inventories, owing to solid execution of its corporate strategy.
For the long-term, OmniVision's goal is to drive and optimize profitable growth from diversified markets and applications. For that, it must continue to focus on technology leadership, expand its market opportunity through diversification on marketable fronts, and improve its cost structure.
OmniVision is looking at gaining a leading position in the industry, as imaging technology continues to proliferate across smartphone markets, from consumer to industry and automotive. It is believed that the foundation of its success is to provide its customers and partners with system-level solutions based on continuous development of both seamless image processing technology and management imaging solutions.
OmniVision is working tirelessly on developing and improving its pixel technology beyond 1.1 microns. It is ramping up volume production of its first sensor based on its new flagship PureCel family as a part of its latest advanced pixel technology.
Targeting different markets
OmniVision is continuing to develop and enhance technologies that can result in the expansion of product design and applications for diversified targeted markets, leveraging the latest pixel technology. Its wafer level camera technology can address the low cost smartphone sector's demand.
In addition, its RGB IR technology can be utilized to create new applications in machine vision, automotive, and mobile products. All these technologies are the basics for innovation in product performance and cost structure and seek to reinforce its technology leadership over the coming years.
The next key focus of OmniVision is diversification on marketable fronts that will allow it to pursue profitable growth for years to come. It is pursuing diversification in different areas including geographic diversification, hardware diversification, marketed diversification, and supply chain diversification.
OmniVision's strong business performance in Asia is attributable to several factors. First, with the rollout of 4G LTE in China, it is expected that both the mainstream and performance markets in China will adopt high resolution cameras.
Second, its improved entry-level portfolio is expected to benefit from the changing trend of developing economies in Africa, Asia, and Latin America's transition to 3G smartphones from feature phones. With smartphones and tablets penetrating the markets, OmniVision's business is expected to become significantly more diversified geographically. This will broaden its customer base and product diversification. The company sees significant interest among customers for its sensors and applications such as eye tracking, machine vision, and mandate reality.
Also, with a variety of wearable devices such as eyewear and watches coming into vogue, OmniVision is looking at growth in this sector as well. The new technology offering of LCOS is significantly popular among customers in new industries and automotive markets.
The automotive business is highly attractive, as high entry barriers and non-product cycles should provide a stronghold for OmniVision and high margins going forward. In addition, security is another proactive market for CMOS image sensors. The trend of transitioning in security from IP cameras and legacy CCDs sensor to CMOS is also expanding OmniVision's market opportunities. OmniVision is capitalizing on the trend towards IP cameras in Asia, due to its broad portfolio of HP sensor solutions in a variety of technologies and package forms. In addition, medical is another long-term opportunity to grow profitably with huge demand for image sensors in the market.
OmniVision has developed unique, high speed, low resolution global standard sensors that are ideal for developing fully integrated human interface solutions in wearable products. There is strong demand from the entertainment market as well as others to use gesture recognition imaging solutions as a human interface tool to support daily activities or work-driven applications.
Also, 3D mapping is an emerging field where OmniVision seeks to grow profitably by developing an imaging solution that utilizes sensors in conjunction with the system architecture on mobile devices that can be used to generate 3D maps of the surrounding environment. So, we can see that the company is seeing opportunities in a number of areas, making it a good long-term bet.
However, OmniVision investors have seen their fair share of ups and downs in the last two years. The stock has been pretty volatile and has been suffering due to increased competition from Sony (NYSE:SNE). However, design wins in Google's Project Tango and the growing use of camera sensors in automotive, medical and wearable tech can give OmniVision a much-needed boost.
The company can also benefit from Tesla's (NASDAQ:TSLA) foray into the European and Chinese market, since it is a supplier to the electric car maker. In the mobile segment, the company still has a big list of customers which include Motorola, Huawei, ZTE and Gionee, along with Apple, which is set to launch the iPhone 6 in the coming months.
In addition, OmniVision also has nearly $410 million in cash and may initiate a dividend or buyback program to reward investors. The company can also spend this cash to facilitate R&D in order to gain back the lost market share.
So, we see that OmniVision could turn out to be a solid investment for the future as there are numerous positive aspects about it. The company is diversifying its business and is also looking to reduce its reliance on Apple. Also, at a trailing P/E ratio of just under 11, OmniVision could be a value play that investors shouldn't miss.
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.