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MagnaChip's Impressive Strategy Change Delivers


  • The company is producing an impressive change in strategy, concentrating resources and attention on higher margin business like OLED display drivers.
  • The strategy change is already paying off pretty dramatically.
  • We think there is upside in the shares, as the cost of the strategy change will fade and some headwind might also wither, while the improvements are likely to last.

We argued a while back that the shares of MagnaChip (NYSE:MX) were due for a bounce. Well, that bounce came and went, and now another one is underway:

The present bounce is powered by solid Q1 earnings, even if they fell a bit short of expectations. We're not too worried about that; there are some headwinds:

  • Seasonality
  • Higher wafer prices
  • Restructuring the display driver business
  • Decline in the Chinese smartphone market

These are mostly temporary, and on the latter especially there is a lot of good news already.

There is a scarcity in 8-inch wafers, but the company is doing everything to opportunistically secure supplies, like:

  • Entering into long-term contracts.
  • Increasing buffer stock at attractive prices when possible.

The latter isn't immediately obvious from the balance sheet as there is a change due to the ASC-606 rule. Overall inventories actually went down 22.5% at the end of Q1 to $56.7M.

Display drivers

The company is making two shifts to address the low margins in their LCD panel driver business simultaneously:

  • Reengineering their LCD driver business.
  • Shifting toward OLED drivers.

The problem with their LCD drivers was that much of it commands paltry margins, and management has decided that they're going to prioritize profitability. What they're doing is:

  • Introducing a platform approach to product development in which the LCD drivers share a common architecture.
  • Not go after low margin business ($11M in the quarter).
  • Transferring $4.4M of LCD driver business in Q1 and approximately $20M for the year in LCD driver business.

As a result, management expects their LCD driver business to decline by half from roughly $30M per quarter last year to $15M this year. Instead, the company is going all-in on their OLED driver business, and it's here where most of the good news is produced.

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

Providing a marketplace service Shareholdersunite Portfolio

Finding the next Roku while navigating the high-risk, high reward landscape.

Looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MX over 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.

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