Himax Technologies Inc. (HIMX, Financial) was badly hurt in 2016 as it was down more than 25%. The stock, however, has been displaying spectacular performance this year, surging approximately 35% year to date.
Himax reported weak first-quarter results in May. For the quarter, the company logged earnings per share of one cent, missing the analysts' estimates by two cents. Revenue came in at $155.20 million, again missing the consensus by $6.89 million. That figure represents a drop of almost 14% compared to 0.7% growth in the same quarter of last year.
Despite the miss, shares of the Taiwan-based company escalated nearly 12% after the report as it has potentially landed a significant design win with a major smartphone customer. Moreover, the company also reported considerably higher capital expenditures due to capacity expansion for wafer level optics (WLO).
While the name of the customer has not yet been disclosed, rumors indicate it could be Apple (AAPL, Financial) as the newest iPhone is likely to feature 3-D sensing technology. Back in February, KGI Securities Apple analyst Ming-Chi Kuo predicted the next iPhone will feature and edge-to-edge OLED display along with a front-facing camera system that comprises three modules that facilitate fully-featured 3-D sensing capabilities.
In addition, Japanese bank Mizuho upgraded its rating on Himax from neutral to buy, suggesting it may be one of the companies whose technology will be considered for the next phone. Moreover, Mizuho analyst Kevin Wang estimated diffractive optical elements (DOE) for 3-D sensing would account for 5% to 15% of the company’s profits this year and in 2018.
While Himax Technologies is primarily known for supplying silicon IPs and LCOS microdisplays for augmented reality, the company has struggled to escalate revenue in recent quarters.
Furthermore, its profit margin has also been on the decline as several of its augmented reality customers have decided to abandon current-generation products. Therefore, a design win for Apple’s upcoming iPhone will certainly provide a boost to its financials.
Moving onward, the WLO sensor order is a huge deal for Himax. Management is moving out of its fabless strategy to build new manufacturing facilities to handle the growing needs of WLO technology. Management believes WLO-powered 3-D scanning could become the next big thing in future smartphones and tablets.
Conclusion
For now, Himax’s growth will likely stick to display driver sales for smartphones and TVs, but that will not be the case in the long run. The company’s LCOS modules and 3-D sensing businesses could rise as the augmented and virtual reality markets lift off over the next several years.
Moreover, if the Apple rumors are true, the deal will surely have a positive impact on the company’s balance sheet. The company is ramping up production of WFO, which will increase its capital expenditures, hurting its earnings in the near future. However, the adoption of the company’s 3-D sensing products will offset the near-term pain since they carry higher margins.
Although the company’s long-term prospects look good, it currently trades at a price-earnings (P/E) ratio of nearly 35, suggesting it is expensive. As a result, investors should consider booking the profit on Himax.
Disclosure: I do not hold a position in the stock mentioned in this article.
