Himax Technologies (NASDAQ:HIMX) has touched new highs and was trading impressively on the stock market as a result of news that it will be supplying LCOS micro displays to Google. But the stock had run ahead of its fundamentals, and investors were buying more shares under the belief that Google Glass will lead Himax to new highs. Despite a slowdown in revenue and a string of bad quarterly results, Himax shares shone. But the scene has changed now.
Bad Times Are Here for Himax
Good times for Himax are almost over and it is doubtful whether the company will be able to maintain its stock price in line with its fundamentals.
Looking at the trailing P/E, Himax is trading at 33 times trailing earnings. The company looks quite expensive. Himax reported $770.7 million in revenue, which was up just 4.5% from the previous year. Thus, the stock kept on rising based on optimism around the Google Glass, while its financial growth stagnated.
Moreover, Himax’s present businesses are also seeing weakness. Its large panel display driver business is struggling and it was down by 25% in 2013. However, management expects little growth in these segments. On the other hand, Himax is expecting good 4K television sales this year.
According to the latest news, manufacturers of 4K TV LCD panels are expecting strong sales in 2014. The Chinese market holds great potential in this segment as it is one of the largest electronics market. As China is a leader in 4K TV sales with 80% shipments, Himax has great opportunities as it has many China-based manufacturers as its clients.
On the other hand, Himax’s small panel drivers have been growing at a brisk pace due to smartphone sales in China and the roll-out of LTE in the country. This will lead to higher demand for handsets. Himax is looking at better margins from sales of high-resolution panels, but this will be offset by low-end smartphone panel sales.
With the growing smartphone market in China, there is stiff competition among different players. Himax, on the other hand, is working on a cost reduction strategy. If the company fails to maintain a cost effective operation, the existing competition in the market might erode Himax’s profit margins. Himax’s earnings could take a hit as the small- and medium-sized display panel business accounts for 54% of overall revenue.
Himax’s non-driver product business is a seeing good growth. This business contributes about 16% to the revenue. Himax manufactures image sensors and LCOS micro displays through this segment, which means that it will be the biggest beneficiary of Google Glass in the future. However, in this segment, Himax might face stiff competition with bigger companies like Samsung and Sony.
The company is having a tough time maintaining its margins and it can see more pains as Google is still working on the glass design and is not likely to launch Google Glass soon. The company is already seeing margin pains in this segment due to oversupply, and there could be more trouble this year as Google won’t be releasing the glass anytime soon.
Himax investors should focus on the company fundamentals rather than get attached to the company emotionally. Himax can be good pick again if Google launches the glass. Until then, investors should see Himax from the sidelines until there are any concrete signs of it getting better.