OmniVision Shouldn't Share

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I've already made my prediction that OmniVision Technologies (Nasdaq: OVTI  ) will be the sole supplier of Apple's (Nasdaq: AAPL  ) new iPhone 4S camera on numerous occasions.

OmniVision rattled investors last quarter, when the company's soft guidance sparked fears that Apple would be dual-sourcing the 8-megapixel shooter and OmniVision would have to share the spot with Sony (NYSE: SNE  ) .

Apple doesn't provide every nitty-gritty detail of the camera, but it did give us some major highlights during the keynote. Let's look at the iPhone 4's camera and what we know about the iPhone 4S's camera and see whether we can glean any insights.

The iPhone 4 used an OmniVision 5MP backside illuminated, or BSI, CMOS sensor with a 1.75 micron pixel size. Only one model matches these specifications, the OV5650, which is designed to deliver digital still-camera quality in smartphones. The company offers other similar sensors, but they either don't match the pixel size, use different technology, or are designed for point-and-shoot cameras. I'm going to operate on the assumption that the OV5650 was used in the iPhone 4.

The evidence
Here's what we know about the iPhone 4S camera. It boasts 3264 x 2448 resolution, uses a "next-generation" and "state-of-the-art" backside-illuminated sensor, and is capable of 1080p HD video recording at 30 frames per second. Some of the other specs mentioned, like the f/2.4 aperture and five Apple-designed lenses, aren't specifically related to the sensor itself, so those won't come into my analysis.

When comparing OmniVision and Sony sensors that possibly fit the bill, two in particular seem like possible candidates: OmniVision's OV8830 and Sony's IMX105PQ. The OV8830, which uses OmniVision's second-generation BSI technology, conveniently sports the exact same resolution of 3264 x 2448, while the IMX105PQ has a slightly higher resolution of 3288 x 2472, which is technically 8.13MP. Both are capable of 1080p HD video at 30 frames per second and have 1.4 micron pixels, so those are pushes.

Apple Senior Vice President of Marketing Phil Schiller continuously emphasized low-light performance over pixel count and boasted gathering 73% more light per pixel in the 4S. OmniVision has always focused its efforts on low-light performance, while Sony has typically gone for brightness and pixel count. The OV8830 also delivers a significant reduction in power consumption, and we all know how much Apple prioritizes battery life.

The OV8830 is one of OmniVision's latest and greatest BSI sensors; it was announced in February 2011 and scheduled for mass production during the second half of the year. Sony announced its IMX105PQ almost a full year ago and was due to hit the market in January 2011.

OmniVision outsources its fabrication to Taiwan Semiconductor Manufacturing (NYSE: TSM  ) , which is based in, you guessed it, Taiwan, while Sony's are produced in Japan. Japan's devastating earthquake adversely affected Sony's operations while Taiwan Semi went unscathed.

Fashionably late
Why did Apple delay this year's iPhone announcement and break the summer tradition? There are a couple of possible reasons that may have contributed. The Verizon (NYSE: VZ  ) iPhone 4 was announced in January, and launching the 4S in June may have alienated Verizon customers who snapped up the January model.

From a supply-chain perspective, the two major hardware upgrades in the 4S are the ARM Holdings (Nasdaq: ARMH  ) –based A5 chip and the aforementioned 8MP camera. The Samsung-produced A5 has been in the iPad 2 for most of the year and so would be unlikely to see any production delays, while A6 and A7 are rumored to be moving to Taiwan.

The new world-mode really isn't new, since Qualcomm's (Nasdaq: QCOM  ) baseband chip found in the Verizon model also had that capability, even if it wasn't used, so it's unlikely to be the cause of delays.

The delayed announcement just so happens to coincide perfectly with the mass production of the OV8830, although, in fairness, if Apple was getting Sony sensors, the earthquake could have caused delays. My money's literally on the former.

The verdict
I think I've built a pretty compelling case here for the OV8830. Dual-sourcing a component this important just doesn't fit Apple's modus operandi.

What's the bottom line for current or prospective OmniVision shareholders, in my opinion? Buy this stock like there's no tomorrow. Heck, if I didn't already own it, I'd be buying it like this Fool. The bears had run this stock all the way down to $12.71 a few short days ago, which is below book value. Current book value sits at $13.66 per share, with tangible book value of $12.52 per share.

Trading below book value is almost like having the market saying it expects negative growth. Last quarter's revenue jumped a whopping 43% from the prior year. Last time I checked -- please correct me if I'm wrong -- 43% is a lot better than negative.

At that recent low, more than half of the stock's value could be attributed to cash alone, since the company is sitting on $7.73 per share in cash and short-term investments net of long-term debt. Over the past 12 months, the company has generated $147 million in free cash flow.

Analysts are estimating roughly $1.14 in earnings per share just in the next two quarters alone, and OmniVision has beat consensus earnings estimates for at least the past five consecutive quarters.

OmniVision has been rallying over the past couple of days on iPhone 4S optimism; yesterday's $17.05 close is a 34% gain from the recent low. I don't think it's too late to buy more, and if you don't take advantage of the dip, this bargain really won't be here tomorrow.

Fool contributor Evan Niu owns shares of OmniVision Technologies, Apple, and ARM Holdings, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple and Qualcomm. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (9) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On October 07, 2011, at 11:03 AM, millsbob wrote:

    Evan, do you or Anders have a guess as to when the ifixit teardown or other info will hit on this?

    i've already got a very large position via synthetic-longs on OVTI, and thinking of adding some out of the money calls for Oct, but expiration is only a week after 4s availability.

    think that's too tight?

  • Report this Comment On October 07, 2011, at 1:20 PM, TMFNewCow wrote:


    I would imagine iFixit's teardown will be out by the end of the month, since they're typically quick about it and the iPhone is a high priority for obvious reasons.

    That being said, unfortunately they don't go deep enough in their camera analysis to confirm its origins. For example, here is the iFixit AT&T iPhone 4 teardown (page 2):

    You'll notice they examine the camera, but not in enough detail to confirm its origins. I like Chipworks because they will go pretty deep, except I think most of their really deep analysis isn't available for free.

    Here's Chipworks' AT&T iPhone 4 teardown:

    You'll notice they show images of an OVTI sensor, but acknowledge this isn't the one actually used due to different pixel size (1.4 vs 1.75).

  • Report this Comment On October 07, 2011, at 1:46 PM, TMFNewCow wrote:

    I think our comment system is having some technical difficulties.

  • Report this Comment On October 07, 2011, at 1:48 PM, TMFNewCow wrote:

    I browsed OVTI's 5 MP sensor offerings and the OV5650 is the only one that matches the specifications that we know (BSI, 1.75 micron pixel, 5 MP, made for phones).

    Unfortunately, it will be somewhat tough to get definitive confirmation on my thesis that OVTI is the sole supplier, but I will certainly be keeping an eye out for clues!

    With regards to your option strategy, I like synthetic longs, but I don't like going long front-month options because they have extremely rapid time decay (high theta). October expiration for a long position is too tight, in my opinion. You're better off selling an October put as an alternative bullish strategy.

    Generally, when I pursue a synthetic long position, I will go long a leap call (as far out as I can) and short a front-month put (or put spread). This way, my short position will decay very quickly while the long position will not. Then you don't have to sweat each day until expiration. I will continue to sell front month puts after each expiration, and hope that after a couple cycles, my long call is paid for and I'm freerolling for the next year or so until the leap expires.

    Hope that helps!

    -- Evan

  • Report this Comment On October 07, 2011, at 2:00 PM, millsbob wrote:

    thanks, Evan.

    my synthetics are for Jan12 and Mar12; i Have been doing this for a Little while... ;)

    those fairly extensive positions are already done; i'm now looking for just a short term quick play on the 4s camera situation specifically, which might play out yes/no in 2 weeks. not my usual thing, but i'm pretty convinced by the evidence i've seen.

    and yes, i'd already looked at that ifixit article; i try to do my research before asking a question. ;)

    so again, my question is: do you think anyone will have a teardown in time for the Oct expiration?

  • Report this Comment On October 07, 2011, at 2:13 PM, TMFNewCow wrote:

    I think there's a very good possibility of a teardown before October expiration. However, I don't think it will provide definitive confirmation and/or be enough to move the stock (especially enough to offset loss in time value), in my opinion.

    -- Evan

  • Report this Comment On October 07, 2011, at 2:37 PM, millsbob wrote:

    thanks, Evan. i've added to my Mar12 position.

    just to clarify: i think OVTI is quite likely to move back to $30 territory when the news gets out, and if so, TV is immaterial.

    glad i asked this question for another reason: just noticed that the jan13 options have popped up. i don't think they were there last time i checked, and it makes your approach of selling time on the puts repeatedly feasible.

  • Report this Comment On October 07, 2011, at 2:48 PM, TMFNewCow wrote:

    For sure, I've actually also been eyeballing those January 2013 calls too, might pull the trigger after a couple days (due to our disclosure policy linked above of a 2-day blackout period before/after an article).

    Gotta capitalize on this low price before it's too late!

    -- Evan

  • Report this Comment On October 10, 2011, at 7:38 AM, aaanglemyer wrote:

    Omnivision is an excellent investment.

    A good investment opportunity is one where the investor's expectations differ from those of them market. So, in order to determine the investment quality of any stock, one must first identify the expectations embedded in the stock price. It is the expectations embedded in OVTI's stock price that make it a great investment opportunity.

    OVTI's Price-to-EBV of 0.6 implies that the market believes that OVTI's cash flows will decrease by 40% and stay there forever. This seems highly unlikely give that OVTI's NOPAT has seen significant growth in each of the last 2 years and the fact that they are the sole supplier of Apple's new iPhone 4S camera. Also, OVTI's 24% ROIC places them in the top quintile of all Russell 3000 companies.

    The upside to OVTI is that even if their cash flows do manage to decline, as long as they decline less than 40%, they will beat market expectations. I think OVIT is ripe for the picking and would be a great addition to any portfolio.

    Check out the following link on uncovering the market's expectations embedded

    in stock prices:

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