Shine On, You Crazy OmniVision

If Sony (NYSE: SNE  ) is stealing market share from camera chip specialist OmniVision Technologies (Nasdaq: OVTI  ) , it's not showing in OmniVision's results.

Apple (Nasdaq: AAPL  ) surely started ordering parts for the soon-to-be-unveiled iPad 2 a long time ago, and that bad boy is expected to ship with dual cameras. Likewise, the iPhone 5 must be far along in the design process, and OmniVision should know whether it's the exclusive camera-chip supplier, just as it was in last year's iPhone 4. In short, OmniVision would have both weak recent sales and a bleak outlook on 2011 if anything were amiss with the Apple account.

And that's simply not the case.

The news
OmniVision's shares jumped sky high on the release of its third-quarter results, with the gain magnified by a sharp drop the day before the release. Non-GAAP earnings more than quadrupled year-over-year to $0.84 per share, putting analyst targets of $0.58 per share to shame. Furthermore, the company set the bar for 2011 results far above Street levels.

When asked specifically about the impact of Sony, Samsung, and other industry giants stealing slices of OmniVision's camera-chip pie, sales VP Ray Cisneros brushed the concerns off like dandruff on a Prada-suited shoulder:

Competition is going to be natural when these markets start expanding. These markets are huge. [...] On the other hand, what differentiates our position is our ability to deliver products on time, our technology, and our ability to work with our supply chains. All combined, we feel very, very comfortable in the marketplace in whatever competitive landscape we come across.

Indeed, Apple is not the only superphone maker singing OmniVision's praises: The customer list also includes Android champions HTC and Motorola Mobility (NYSE: MMI  ) , not to mention BlackBerry designer Research In Motion (Nasdaq: RIMM  ) . Thus, buying OmniVision is an industrywide play on smartphones of every stripe and color.

Preach it, brother!
I can't blame Ray for that comfy groove. OmniVision's backside illumination, or BSI, chip technology is years ahead of the competition for the simple reason that the company stuck to its guns while others discarded that technology for being tricky and expensive. The manufacturing lead alone is enough to ensure at least a couple of years of top-dog status -- and high-end mobile devices that want to use cameras as a selling point must take a serious look at these chips.

If Sony or Samsung -- or anybody else -- really wants to own this market, they'd have to either buy OmniVision outright or start sending gravy-drenched license checks for the right to use OmniVision's BSI-related inventions. The third option, of course, is that OmniVision simply soldiers on alone and unchallenged in the BSI field until its rivals catch up. This quarter's outperformance shows how high demand is for these chips, and any of those three outcomes will reward OmniVision investors handsomely.

Who else works like that?
Pure-play dominators of a tightly focused market are hard to come by:

  • Intuitive Surgical (Nasdaq: ISRG  ) nailed down its peerlessness by building a patent-protected fort and then buying its only serious rival.
  • Middleby (Nasdaq: MIDD  ) did the same thing in restaurant-grade cooking equipment, as it purged itself of distractions to focus on ovens and cooktops with market-crushing results.
  • And now we have OmniVision turning its sights on BSI chips in a beautifully myopic manner. Now that the hard work is done, an average hamster of mediocre talents could run this company and still give shareholders a serious return on their investment.

Of course, hamsters aren't running the company, and a management team bold enough to create this opportunity in the first place should be in great shape for taking OmniVision to the next level. It's a textbook case of how Jim Collins sees companies move from merely good to truly great, which tends to reward early bird investors.

This is OmniVision's time to shine, and the company is delivering on that promise.

Add OmniVision to your Foolish watchlist by clicking here.

Fool contributor Anders Bylund owns shares of Intuitive Surgical but holds no other position in any of the companies discussed here. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. The Fool has written puts on Apple. 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 (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2011, at 3:09 PM, gtsmoker wrote:

    How did revenue rise 11 percent to $265.7 million with 194 million units as compared to 185 while asp only increase from 1.29 to 1.37 without stuffing the channel? t

  • Report this Comment On February 28, 2011, at 4:29 PM, stshaun wrote:

    Do the math. The numbers are right there.

    ASP 1.37 x 194M units equals $265.7

    ASP 1.29 x 185M units equals $238.65

    This quarter was $27M higher in revenue which equates to over an 11% increase from last quarters revenue.

  • Report this Comment On February 28, 2011, at 4:56 PM, stshaun wrote:

    Plus I have no idea what you could mean by "stuffing the channel" since omnivision is just a component supplier and not a device manufacturer.

    Do you think Apple will just let them send extra sensors? Their customers are all sophisticated manufacturers who aren't going to let them stockpile shipments within their warehouses.

    Internally their inventory fell which is why their cash rose so much (now around $9/share).

    If you subtract cash from stock price OVTI trades well below 10 P/E with a high growth rate and competitive advantage.

  • Report this Comment On February 28, 2011, at 6:58 PM, stshaun wrote:

    Actually half of their business is to distributors, so they could stuff their.

    But with inventories declining significantly and AR going from 46 days to 41 days at a steady figure, stuffing doesn't look plausible.

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