Himax: One Of The Few Taiwanese Stocks To Own

Summary

• Himax has been showing a stellar performance in the first half of the year.
• The company has all the chances to continue to exceed its guidance and generate more sales in the foreseeable future.
• At the current price, Himax appears to be a solid, long-term stock to own for value and growth investors at the same time.

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Himax's (NASDAQ:HIMX) business has been exploding in recent quarters, as the demand for its products and solutions has been increasing amid the chip shortage crisis. The company is already on track to have a record year, while its margins are expected to remain at historically high levels. Even though there's a risk that due to the worsening of relations between China and Taiwan Himax's business could be disrupted in the short-term, at the current price its stock still appears to be a solid long-term play for value and growth investors at the same time.

There's Even More Growth Ahead

Himax is a fabless semiconductor company that designs chips. Its headquarter is located in Taiwan, but it also has R&D centers all across Asia. The thing that differentiates Himax from other semiconductor businesses is that it's one of the few niche players that specializes in designing various display solutions. Right now, the company is one of the leaders of the display driver integrated circuits (DDICs) market, as it currently has a 10% market share there.

Himax sells mostly DDICs that are used in a wide variety of consumer electronic products, while it also designs display technologies for different panels of all sizes. Some of its operations include the designing of image sensors for AR and VR devices, the development of 3D sensing technology for face ID recognition, and the creation of display technology for vehicle infotainment systems.

Thanks to the ongoing chip shortage crisis and the increased demand for display driver integrated circuits, Himax's stock started the year with strong gains. While its shares have started to depreciate in recent months, the company still shows a better YTD performance in comparison to the S&P 500 index.

Chart: Seeking Alpha

The good news for Himax is that the demand for its products and solutions is still high, so it's safe to assume that its margins will remain at the current historically high levels. In addition, there's an indication that issues with securing foundry capacity will last until the next year at the very least, which is a good sign for Himax as well. In order to avoid such situations in the future, the company's clients are now likely going to sign long-term agreements to minimize the risks of a possible chip shortage crisis in the future, which is a positive thing for Himax's business.

Going forward, Himax has several catalysts for growth, which should help it to improve its business and create more shareholder value along the way. First of all, the display driver market is expected to grow at a CAGR of 5% in the following years. Himax, as one of the leaders of this market, will benefit from such growth, as the company is already one of the leaders in providing display driver chips to manufacturers of 4K TVs, and is also one of the first to work with manufacturers of 8K TVs. The smart TV market alone is expected to grow at a CAGR of 16.52%, so it's safe to assume that Himax will have plenty of orders from TV manufacturers for months to come.

In addition, Himax is also expected to benefit from the increased demand for the touch and display driver integration (TDDI) solutions, which help OEMs to make consumer devices such as smartphones thinner and less expensive. The TDDI market is expected to be worth $1.59 billion in 2025, up from $1.27 billion in 2021, so Himax will have plenty of opportunities to drive its sales in this business as well.

Last but not least, Himax is also poised to greatly benefit from the expansion of the IoT industry, as most smart devices will need screens or some form of 3D sensing technology to interact with end-users. The IoT industry alone is forecasted to have a CAGR of 25.4% in the next few years, so Himax, with its more than 3000 display-related patents, will be able to capitalize on this growth as well.

Making Sense of Numbers

Himax is expected to release its Q3 earnings results later this week, and there's every reason to believe that it will meet or even exceed its own guidance once again. Considering that in Q1 and Q2 Himax increased its revenues by 67.4% Y/Y and 95% Y/Y, respectively, to $309 million and $365.26 million, respectively, the company is already on track to have the best annual performance since its inception in terms of sales. In Q3, Himax expects its revenues to increase 13% to 17% Q/Q, while its gross margin is expected to be in the range of 50.5% to 52%, higher than the gross margin of 47.5% in Q2. There's every reason to believe that Himax will be able to achieve those goals, since as it was noted before, the demand for its products and services remains high, while the chip shortage crisis is not going away anytime soon.

Source: Himax

Another positive thing about Himax is that it has a healthy balance sheet. At the end of Q2, the company had $270 million in liquidity and only $160 million in total debt. What's more important is that at a market cap of $1.8 billion, Himax trades at less than 2 times its sales and could be considered significantly undervalued at the current levels. Its stock has a forward P/E of only 5.2x, while the industry's average forward P/E is 24.6x, even though Himax has better profitability metrics, as its EBIT and net income margins are 22.7% and 18.3%, respectively, against the industry's median EBIT and net income margins of 9.3% and 6%, respectively. By looking at those numbers, we could safely say that Himax is a solid value play at the current prices with more than enough catalysts to create additional shareholder value along the way.

On top of all of this, Himax is also an attractive dividend play. Just this year the company has reinstated annual dividends and paid $0.27 per share in July. The current yield stands at 2% and is expected to increase to at least 3.5% in the following years, since thanks to the expected stellar performance in the following quarters, Himax will be able to significantly improve its underlying business.

Another important point fact that investors need to know is that currently, Himax has a short interest of 21%, while public investors own nearly 50% of its outstanding shares. Considering that Himax's business is expected to continue to perform well in the future, there's a possibility that its stock price will be climbing higher, especially after the release of the Q3 earnings report, which will lead to the squeeze of short-sellers and the rapid appreciation of the company's shares at the same time.

Risks

Political risk is the only major downside of Himax since its headquarter is located in Taiwan. In recent months, China has been escalating tensions with Taiwan, even though it said that there would be no war with the island nation, which it views as a part of its own country under the One China policy. While Presidents Biden and Xi Jinping agreed to abide by the Taiwan agreement in October, there's a risk that China will be pressuring its domestic companies to cut ties with Taiwanese businesses in order to hit Taiwan economically and enforce its peaceful annexation agenda. This will be a negative event for Himax since a large portion of its clients and foundry partners are located on the mainland.

Another risk of Himax is that there's a possibility that the company will not meet its guidance and the stock will tumble. However, it's very unlikely that the company will show poor performance, as the demand for its products and solutions will remain strong in the foreseeable future.

The Bottom Line

Right now Himax appears to be a solid long-term stock to own for value and growth investors at the same time. The company is undervalued by major metrics against its peers, as it doesn't trade at rich multiples, even though it has solid margins and lots of catalysts for growth. In addition, because Himax's business is experiencing explosive growth right now, its stock could be considered a bargain at the current levels.

Currently, Seeking Alpha's quant system gives the company a bullish rating, while advisory firms are bullish on Himax as well and give it a consensus price target of $20.83 per share, which represents an upside of nearly 100% from the market price. While Himax's stock currently consolidated around $10 per share, it has all the chances to appreciate in the foreseeable future, especially once its earnings results for Q3 are out and the guidance for Q4 is issued later this week.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HIMX either through stock ownership, options, or other derivatives. 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.