When the Street unfairly punished OmniVision Technologies, Inc. (NASDAQ:OVTI) a quarter ago for failing to provide a snazzy outlook, it was clear that this overreaction would open up opportunities for astute investors. Well, those investors certainly celebrated this weekend with a bottle of champagne as OmniVision shares overreacted on the positive side after it released its fourth-quarter results.
The stock soared close to 20% as OmniVision Technologies, Inc. (NASDAQ:OVTI) delivered a heavy beat and guided well above Street estimates, which isn’t surprising as the company’s business has been showing signs of promise from last year. There are a ton of catalysts that can drive OmniVision Technologies, Inc. (NASDAQ:OVTI) even higher going forward.
Let’s begin with A for Apple Inc. (NASDAQ:AAPL)
While seasonality was the primary reason behind OmniVision Technologies, Inc. (NASDAQ:OVTI)’s shallow guidance last time, this shouldn’t be a factor going forward as we move into the second half of the year. Its major customer, Apple Inc. (NASDAQ:AAPL), is readying its next-gen products. It is rumored that Apple Inc. (NASDAQ:AAPL) supplier Sharp would start ramping up production of displays for the next iPhone this month.
Throw in the upcoming iPads, more importantly the iPad mini, which is expected to have a retina display this time, and things start looking even better for OmniVision Technologies, Inc. (NASDAQ:OVTI). It is rumored that Apple would launch the refreshed version of the iPad mini in the fall/autumn period and production is expected to start in summer. It shouldn’t be forgotten that the iPad mini sold at a supersonic clip last holiday season and a retina-sporting model will probably generate more revenue for Apple Inc. (NASDAQ:AAPL), and OmniVision, in turn.
But, why is Apple Inc. (NASDAQ:AAPL) so important for OmniVision Technologies, Inc. (NASDAQ:OVTI)? Well, it had supplied camera sensors for the iPad mini, the fourth-gen iPad, the latest iPod, and the secondary camera sensor for the iPhone 5. Moreover, Apple Inc. (NASDAQ:AAPL) is rumored to launch a budget iPhone for the emerging markets, which it might start producing next month. If such a product is indeed launched, then OmniVision will see its addressable market increase by one more product and a few million more customers (probably).
Conquering the Middle Kingdom
OmniVision expects to benefit from the burgeoning Chinese smartphone market and has landed a few design wins at some of the major tier 1 handset makers in the country. Better sales to Chinese customers helped OmniVision exceed its guidance in the previous quarter, and as smartphone makers from the region are going international, OmniVision should enjoy further growth going forward.
According to Needham analyst, Rajvindra Gill, OmniVision counts Huawei and ZTE as clients and since both these companies enjoy solid positions in the Chinese market, things should get better from here as customers in China move to smartphones. The smartphone market in the country is growing at a rapid pace and there’s a great opportunity for growth going forward as 80% users are still on 2G devices in the region.
Going for a drive
OmniVision is upbeat about its prospects in the automotive business. It is counting on various applications, such as the rear view camera, along with surround view and mirrorless cameras. OmniVision has made some notable moves in this segment as it counts some important car makers in Europe and North America as customers.
Last year, Tesla Motors Inc (NASDAQ:TSLA) selected OmniVision’s sensor for the rear-view camera application for the Model S, which I believe is something of great importance. Tesla Motors Inc (NASDAQ:TSLA) is continuously looking to build upon the success of the Model S, and it might even start selling the car in China if it generates enthusiasm at the Chengdu Motor Show later this year. Moreover, Tesla Motors Inc (NASDAQ:TSLA) is looking to enhance the adoption of its car in the U.S. through a number of moves such as expanding its supercharger network and modifying the lease plan.
Tesla seems to be one of the feathers in OmniVision’s automotive cap as the company believes that the proliferation of image sensors in cars of the future will present a big opportunity for it.
And then some more
In addition to all the above-mentioned positives, OmniVision is focused on improving its gross margin further going forward. The company is looking to optimize its supply chain and focusing on the sales of high-margin products to get better in this regard. Throw in a compelling valuation and the deal would seem even sweeter.
OmniVision might seem expensive at 23 times trailing earnings, but when you consider that its revenue and earnings have grown at a solid rate in the past two quarters then it starts to look cheap. Moreover, a forward P/E of just 10 times makes the multiple look better and OmniVision would probably generate the required earnings to justify its cheap valuation going forward, given its solid catalysts.
However, OmniVision is a pretty volatile stock, as seen in the past, but barring a few potholes, the ride is more or less smooth and you should consider giving it a try.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple and Tesla Motors . The Motley Fool owns shares of Apple and Tesla Motors . Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Few Reasons Why This Explosive Stock Is Worth Buying originally appeared on Fool.com is written by Harsh Chauhan.
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