Monday, September 12, 2011

Omnivision: Seeing Value

Omnivision Technologies (OVTI) designs and sells chips that capture digital images. These chips are used in cameras, smartphones, tablets, PCs and a slew of other devices. In just the last two months, the company has lost half of its market value, even though it is well capitalized and trades at a single-digit P/E.

Omnivision trades for $1 billion, despite having $500 million in net cash and $130 million of earnings in its most recent fiscal year. The sharp fall in the stock price is largely related to a reduced outlook for the current quarter, as unanticipated delays for new product launches are expected to reduce near-term profits.

When the market focuses on the short-term, this is precisely when value investors should look to strike. This appears to be a classic case of a short-term leaning market. However, before jumping in, value investors should recognize a few risks that make Omnivision a less-than-ideal investment.

Because the company operates in a field constantly undergoing change, the company's earnings power is difficult to determine. Though the company has managed to pull off solid returns some years, it has also had a few poor ones. Omnivision has to constantly cut its costs, innovate and push volume in order to remain competitive. Lately, things have gone relatively well for the company, but that can always change.

This industry is also characterized by its falling prices and reliance on just a few customers. Omnivision's top two customers make up 30% of its revenue, and its top 5 customers represent 55% of its revenue. Since competition is fierce in this industry, where Omnivision battles companies with large resources such as Sony and Samsung, it's entirely likely that the company could lose one or more of its revenue streams. For example, if Apple decides to replace Omnivision's chips with a competitor's in a next-generation iPad, profits would take a major hit.

Finally, much of the mass-manufacturing of these products is done overseas. While this allows the company to take advantage of less restraining tax regimes (as compared to those of the US), it does mean that a large part of the company's cash balance would be subject to repatriation taxes if returned to shareholders.

Omnivision is a profitable company with a strong record of returns that is well capitalized. However, there are some risks investors should look out for, some of which could serve to reduce the company's value considerably.

Disclosure: No position


Anonymous said...

Hi Saj,

Would you invest in OVTI now that it is almost selling at cash at hand.
It is a cash bargain. Or would you avoid it due to iphone 4s miss.

Saj Karsan said...

Hi Anon,

Quite a fall it has taken! I'll have another look, and post back here if I have any thoughts.

Anonymous said...

Thanks Saj

Saj Karsan said...

Hi Anon,

I don't think the cash is worth its stated value, because the taxes this company pays are ridiculously low; before shareholders can see any of it, there would be huge repatriation taxes.

It does look cheap though, but the customer concentration and requirement to constantly come up with superior technology still scares me off a little.