Why I Bought OmniVision

Camera-chip maker OmniVision Technologies (Nasdaq: OVTI  ) has been on my radar -- and my watchlist -- for a long time. The only provider of a more efficient sensor technology known as backside illumination (BSI) is riding the smartphone and tablet crazes like nobody's business. Apple (Nasdaq: AAPL  ) uses OmniVision's BSI chips in iPhones and iPads. Many high-end Android devices also depend on the low-light efficiency and minuscule power draws of these chips.

Longtime rivals such as Toshiba, Sony (NYSE: SNE  ) , STMicroelectronics, and Samsung had left BSI technology for dead because it's not an easy thing to do. Now they're all playing catch-up to OmniVision's head start, because the little camera-chip specialist spent the time, effort, and money to work out all the kinks. For the next year or two, this company remains unchallenged in the open market even as BSI technology catches smartphone fever.

The time to act is …
So when OmniVision shares recently dropped 30% in a single day, you bet I paid attention.

My ears really perked up when I saw the reason for the drop. OmniVision delivered yet another estimates-crushing quarter with 43% year-over-year sales growth and nearly double the earnings, so there's nothing scary in the rear-view mirror. But guidance for the next quarter came in a little bit light, so investors and analysts jumped to the conclusion that Apple must have gone somewhere else for the iPhone 5's camera chips.

Curtains. Horror. Someone please pull the fire alarm, because the panic isn't outrageous enough yet.

The same thing happened to Cirrus Logic (Nasdaq: CRUS  ) last year when unsubstantiated reports placed competing audio chips in the next iPhone. Those rumors crushed Cirrus shares, but were quickly debunked -- and share prices bounced back.

A bargain becomes a screaming buy
OmniVision shares were affordable before the calamitous drop, including a deep swoon alongside the general market panic in early August. Another 30% drop on short-sighted conjecture was the trigger for me -- I had to own this stock.

This wide-open buying window is exactly why I keep a watchlist. Keeping a close eye on your favorite stocks will let you take action when the market gets irrational. It happens more often than you might think.

Let me put OmniVision's deep-discount valuation into perspective for you:

Company

Price to LTM Earnings

Price to LTM Sales

LTM Revenue Growth

CAPS Rating
(out of 5)

OmniVision 7 0.55 50.5% ****
Micron Technology (Nasdaq: MU  ) 8.7 0.67 25.4% ****
Atmel (Nasdaq: ATML  ) 6.7 1.9 31.3% ***
Cypress Semiconductor (Nasdaq: CY  ) 21 2.4 17.8% *****

Data from Capital IQ, a division of Standard & Poor's.

I already own Micron shares precisely because they're ridiculously undervalued, but OmniVision's combination of high growth and low prices makes all of these chip stocks look expensive.

Keep your options open
I opened a fresh OmniVision position last week. Mind you, I'm making a short-term trade in Foolish terms by starting a synthetic long options position rather than just buying the stock. In short, I'm so confident of a near-term bounce that I'm willing to put some leverage behind this investment.

I see two catalysts sending the stock higher well before these options expire:

  • Apple releases the iPhone 5, iFixit, ChipWorks, and iSupply tear it apart, and find OmniVision cameras inside.
  • OmniVision releases second-quarter results in November, proving beyond a reasonable doubt that timid guidance was due to macroeconomic caution and not share loss with Apple.

Call me crazy, call me a gambler, but I like my chances to see both of these catalysts igniting the stock. The last time shares were this cheap, they rested on $600 million of trailing sales and nearly breakeven earnings. Now we're paying the same prices for billion-dollar sales and a 14% net margin.

As long as OmniVision gets back over $21 a share before mid-January, I'll make a tidy profit. If not, my written puts may very well convert into very reasonably priced shares while the calls expire worthless. I'd be all right with that as well, and I also have the option of rolling the position over into longer-term alternatives. This is a darn flexible investment vehicle with very small capital requirements.

Read up on Foolish options strategies here:

Fool contributor Anders Bylund owns shares of Micron and has created a synthetic long position on OmniVision, but he holds no other position in any of the companies discussed here. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor and Apple, as well as creating a bull call spread position in 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. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

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 September 07, 2011, at 10:00 PM, teryakisauce wrote:

    There is a lot of false information here.

    On BSI technology you say "the little camera-chip specialist spent the time, effort, and money to work out all the kinks.". Not true, their fab TSM did all that and they own the IP. Omnivision is essentially a marketer. TSM may license its tech to anyone at any time.

    Sony was in fact first to market with BSI in DSC and digicams. They have been in Ericsson smartphones almost a year now. Samsung BSI is in Samsung smartphones also.

    Anyone investing in OVTI because they think Omnivision has a valuable proprietary IP is sorely mistaken.

  • Report this Comment On September 08, 2011, at 11:21 AM, botfeeder wrote:

    terakisauce:

    Your comments are food for thought but if there is not a good share of the expertise on these sensors at OVTI and not just at TSM, how come OVTI appears to be the dominant supplier of this technology?

    If anyone can do it, how come OVTI is getting the business?

  • Report this Comment On September 08, 2011, at 2:04 PM, russfischer1013 wrote:

    botfeeder:

    It is not that BSI is easy to do...it is not. The problem is that the IP involved apparently belongs to TSMC. As such TSMC is hosing OVTI on the BSI wafers. OVTI is stuck at about 30% gross margin for what appears to be a proprietary product. 30% gross margin is among the very lowest in the semiconductor sector. Check it out. OVTI should be at 50-60% gross margin.

    The company is also not very honest about reporting their largest customers as required by accounting rules. Apple HAS to be 40-50% of the business, yet Apple is not even mentioned in the 10Q and 10K sections on 10% customers.

    I made a $1 million on OVTI options last year so I am grateful, but it should have been $5 million if the technology really belonged to OVTI.

    IMO, there is something wrong with the company and I don't trust management.

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