OmniVision Is Under Attack!

It looks like OmniVision Technologies (Nasdaq: OVTI  ) is under attack.

I've been busy explaining how the company's back-side illumination (BSI) camera chips are the key to OmniVision's future, and how none of the usual suspects are even close to challenging OmniVision's first-mover advantage. But Sony (NYSE: SNE  ) thinks otherwise: The Japanese electronics giant is investing heavily in camera chip manufacturing facilities.

The available sources don't specifically say that Sony is investing in BSI chips, but the chip volumes they're talking about point to products that Sony isn't making a whole lot of today. Bog-standard camera chips are a dime a dozen these days, and Sony has already made noise about increasing its market share of mobile image processors from 10% to 30%. Given these facts, I think it's safe to assume that Sony is going after OmniVision's bread and butter.

Before you panic and hit the "sell" button on OmniVision, consider that Sony, Panasonic (NYSE: PC  ) , and other camera chip rivals already gave up on BSI technology once because they couldn't figure out how to make the darn things in a cost-effective way. OmniVision has built up a large lead in design expertise and isn't likely to share its secrets willy-nilly. The others may eventually catch up, but the next couple of years still look like a golden age for the company thanks to a large head start.

Whether Sony eventually closes the gap or just ends up throwing good money after bad, OmniVision holds a winning hand just as the smartphone phenomenon hits the tipping point, and is the camera chip supplier for trendsetter Apple (Nasdaq: AAPL  ) and its iPhone 4. The heavy lifting is already done in the form of BSI development, and now it doesn't take much to parlay that advantage into real-world business success.

Fellow Fool Tim Beyers likes OmniVision so much, he added the stock to his CAPS portfolio. I'm doing the same right now, because the market is overreacting to the Sony attack and giving me a nice entry point. This should bolster my All-Star CAPS status a bit, and you're welcome to join me right now.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Apple is a Motley Fool Stock Advisor pick. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (14)

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  • Report this Comment On December 28, 2010, at 7:29 PM, freakyguy666 wrote:

    Excellent article. The difference between a fool and a Fool is that Fool's dig deeper than the headline when articles like the recent one about Sony trying to go after OVTI come out.

    First, OVTI's chips are used in not just apple products, but also a slew of other Smartphones. This area is EXPLODING given that the number of smartphones is currently growing exponentially year over year--especially now that future devices are likely to have TWO image sensors (one for taking pictures and another for video chat). Additionally, Congress is on the verge of passing a law to REQUIRE image sensors on all cars in a few years for rear view cameras. There are also a host of security and medical device manufacturers that are increasing the use of OVTI's image sensors every year. The point is that the space OVTI plays in is in HYPER GROWTH and there is plenty of room to share with other competitors without significantly affecting their growth!

    With regard to Sony, the fact is that only a fraction of Sony's new plants would be utilized for Image Sensors. Secondly, their plants won't even be 100% operational until well into 2011 if not 2012. Third, OVTI's second generation of BSI (BSI-2) is scheduled to ramp in the middle of 2011 and that architecture should allow OVTI to blow away Sony's BSI chips BOTH on PRICE and QUALITY. So the Sony threat is really a non-threat to anyone who is familiar with OVTI's BSI roadmap versus their competition.

    Fundamentally, OVTI will have about $9 in CASH by the end of 2011 and is expected to earn $2.35 in their next FY. Back out the cash and it is trading at just over 8.5 times those Earnings! If anyone wants to sell it here, at least tell us where you will find a better value with the same growth prospects...

  • Report this Comment On December 29, 2010, at 4:49 PM, raidtheparade wrote:

    Well said Anders. In addition, Sony's move may well be the catalyst that prompts Samsung to make a play for OVTI. With Samsung a distant second in this space despite a market cap dwarfing OVTI by orders of magnitude, the acquisition of OVTI's patent portfolio makes more and more sense.

  • Report this Comment On January 03, 2011, at 12:08 PM, mtbinnc wrote:

    Before investing in OVTI perhaps someone might want to check out the basis for BSI technology actually technically feasible. Hint: It involves wafer bonding in such a way as to limit distortion and still provide scalable manufacturing processes and is protected by numerous patents filed throughout the world.

  • Report this Comment On January 03, 2011, at 2:54 PM, raidtheparade wrote:

    Backside illumination technology has been around for more than a decade. The unique nut that OVTI has cracked is how to commercialize BSI cost-effectively. In other words, OVTI maintains a two-fold advantage, the first being their engineering acumen and the second (perhaps more compelling) advantage being their business model. The latter will be largely unassailable by any competitor. In that sense, OVTI is to the supplier space as Apple is to the consumer space. Short at your own peril.

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