Saturday, April 21, 2007

The Long Case for OmniVision Technologies Inc.

OmniVision Technologies is in the semiconductor industry and they sell camera chips that are used in cell phones, digital still and video cameras, personal computer camera applications and interactive video, digital toy cameras, security and surveillance products and analog toy cameras, automotive products and medical imaging devices. Wall Street has not been kind to OVTI recently, it has been downgraded 8 times in the past 8 months, compared to only one upgrade. They have been struggling as of late with earnings and margins falling significantly. OmniVision has been busy clearing out old inventory, which in the FIFO accounting method (OmniVision's accounting method) uses for the technology sector results in lower margins, and continued price pressures because of heavy competition in semiconductors.

Gross Margin has slumped from a high of 45.26% in Q2 of Fiscal year 2005 to a low of 24.93% just in the past quarter.

Here are the Gross Margins for the past 3 fiscal years:

2005 40.34%
2006 36.94%
2007 31.49% (first 9 months)

Earnings have also slipped significantly which is no surprise because of the depressed stock price.

They are currently trading at $13 a share. $6.09 of that is backed by net cash/short term investments per diluted share. So OVTI's operations are only selling for $6.91 per diluted share. The balance sheet is rock solid with almost no debt. They also just authorized a $100 million stock repurchase program. Selling as compared to the Semiconductor Index ($SOX) it is selling at its trough valuation of the past 3 years of the ratio of $SOX:OVTI of 38.

Semiconductors is a tough business, but OVTI won't go anywhere as long as Cell Phones are being sold in millions. I am currently long OVTI.


Anonymous said...

I agree that the valuation case is compelling but $6/shr in cash won't save you when competitors like Micron (MU) and MagnaChip that have their own fabs truly want to take marketshare. I've followed the company for almost 3 years and, while there have been some "good times", it has mostly been a period of management trying to catch up to competitors or squandering their brief technology advantage by failing to introduce products on time. OVTI doesn't own their own fab which means that have lower capex but it also means they have much less control over price and costs related to manufacturing. If you're long, you better have a reasonable stop-loss on this pig.

Alex Shadunsky said...

This should give them more flexibility in developing and manufacturing their products. I think that by the time Micron and MagnaChip are producing the product, it's a mature product and OVTI should be out of it anyway.