OmniVision Puts a Fizzled Year in the Rearview Mirror

OmniVision Technologies (Nasdaq: OVTI  ) was one of the best-performing chip stocks in 2010. Riding high on a technological advantage in backside illumination camera chips, OmniVision cameras were popping up in Apple (Nasdaq: AAPL  ) iPhones and other hot sellers. Share prices doubled in 2010, and 2011 looked like another slam dunk waiting to happen. But here at the tail end of the year, OmniVision shares have plunged more than 60%. How did that happen?

Off to a great start
In January, the stock stumbled as one analyst predicted that Apple might turn to Sony (NYSE: SNE  ) for the next iPhone's main camera. I scoffed heartily at that notion, because Sony still had a lot of technical ground to make up in the BSI game.

The next month, OmniVision blew the roof off analyst targets in a stellar earnings report. "We feel very, very comfortable in the marketplace in whatever competitive landscape we come across," said sales VP Ray Cisneros. Once again, this stock looked like a terrific cross-platform play on the smartphone market.

The company beat expectations again in May and the stock hit an all-year high at $37 per share. I compared the stock to Intuitive Surgical, based on the robotic surgery expert's totally unassailable technology lead. "The Backside Illumination, or BSI, sensor chip structure is every bit the cash-cow selling point I expected it to be," I said.

Hold on to your hats, folks -- it's all downhill from here. Time to start eating crow.

There are ghosts, not gold, in them thar hills                                                            
When the supposed iPhone 4S finally showed up, Apple bragged about the "next-generation backside illumination sensor" with its increased sensitivity and short exposure times. Sure sounded like OmniVision!

When third-party experts tore the phones apart, they found the usual Cirrus Logic (Nasdaq: CRUS  ) audio chip and a fairly familiar radio-signal setup using Qualcomm (Nasdaq: QCOM  ) processors. The touchscreen controller is still a Texas Instruments part, continuing a tradition started in the iPhone 3GS. And what's an iPhone without a Broadcom (Nasdaq: BRCM  ) WiFi and Bluetooth module? There are some major changes too, but traditional choices stayed strong.

With this much of the phone's guts built by the same old suppliers, why would OmniVision lose the camera slot? This ghostly X-ray image of the sensor chip came as a shock:

 

 

Image from Chipworks.

Yep, that's a Sony logo for sure. Though analysts insist that Apple probably dual-sourced this chip with a hearty helping of OmniVision models, IHS iSuppli and Chipworks have so far reported five Sony instances and no OmniVisions between them.

So the Apple of OmniVision's eye looks rotten to the core. Winning the secondary, front-facing camera spot isn't nearly as impressive or important because it's a much lower-end and cheaper part. The firm does provide camera sensors to other hot-selling smartphones, including the Motorola RAZR and Droid Bionic, but these things just don't sell in the massive volumes the iPhone does.

Looking ahead
So here we are, denied an OmniVision-powered iPhone 4S and with share prices some 60% below the January level. The company is now in the habit of posting gloomy forecasts, though sometimes they're not quite pessimistic enough. Sony has apparently caught up in the BSI race and can deliver competitive chips at reasonable prices. OmniVision's next-generation BSI 2 technology is too new to make an impact just yet, though bulls hope that this evolution will keep the good times rolling a while longer.

2011 wasn't kind to OmniVision. I'm keeping my shares because they're priced for absolute disaster and no more growth, ever. Will 2012 be a different story? I believe it will and have real money backing that prediction, but only time will tell. Add OmniVision to your Foolish watchlist so you can follow this yarn as it happens.

OmniVision isn't the only great smartphone play for 2012, either -- here's three more ideas from Fool analysts.

Fool contributor Anders Bylund owns shares of OmniVision and Intuitive Surgical but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Apple, Qualcomm, Cirrus Logic, and Texas Instruments. Motley Fool newsletter services have recommended buying shares of Apple and Intuitive Surgical, 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 opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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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 December 22, 2011, at 8:47 PM, constantnormal wrote:

    Also the current fundamentals ... trading below book value, with plenty of cash, modest debts, net profit margins of over 13%, and a PE of only about 5.3 ... priced for oblivion describes them perfectly. However bad the loss of a big chunk of Apple's business was (they still have one of the cameras in the iPhone 4S, according to ChipWorks), I cannot help but notice that Android phones sell in similar or greater unit volumes, and there is an excellent chance that many of them are sporting OVTI camera modules. While the iPhone certainly rakes in much higher profits (gross understatement) at the device level, little of that filters down to the component suppliers, who likely make just as much profits from going into Android phones as they do going into iPhones. We'll see how the profits roll in as 2012 moves on, but I seriously doubt that "oblivion" is in the cards for OVTI.

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