Don't Buy Into OmniVision's Outlook

I see that OmniVision Technologies (Nasdaq: OVTI  ) has come full circle -- nearing the $18 mark -- since last August, when I first covered it. Just three months down the line in December, OmniVision was languishing around $12 as its business was hit by order cutbacks from one of its largest customers. The stock has gained an impressive 48% since then.

The rebound might lead you to think that OmniVision is back on track. But does the stock price really reflect what's actually going on at the company? OmniVision beat the Street's estimates in the just-concluded quarter, yet it also saw its profits almost wiped out and it barely broke even.

Why you should be cautious
OmniVision's smartphone business has declined, even as most smartphone component manufacturers are seeing their revenues rise. Shipments fell, prices have fallen, and this division's contribution toward the company's revenue plunged by 8%. The fall was triggered by the loss of its contract with smartphone giant Apple (Nasdaq: AAPL  ) , which chose to use Sony's imaging sensors in the iPhone 4S, thus destroying OmniVision's monopoly in that area.

The company's quarterly revenue dropped 30% from last year, while inventories grew by a mammoth 164%. That's a clear sign that OmniVision isn't able to move enough units, and the effects of an inventory writedown are taking a toll on margins. Shipments fell to 143 million units from 153 million in the preceding quarter. The average selling price also dropped from last quarter, to $1.29 from $1.42.

Yet although these factors have left OmniVision in a tough spot, investors are giving the company a thumbs-up, with shares having spiked 7% after the earnings report came out. Let's see why.

More beat-the-Street action
OmniVision has beaten the Street for three straight quarters. It looks to do the same in the ongoing one as well, projecting revenue in the range of $195 million to $215 million compared with the expectation of $170 million. This upbeat outlook comes on the back of rumors regarding OmniVision's potential success in finding a slot in the much-anticipated iPad 3 -- a move that, if true, could probably trigger a recovery of its relationship with the Cupertino tech giant.

The company is now also supplying imaging sensors to Asus for the Transformer Prime tablet -- but I'm not reading too much into that move. The Apple iPad is the mover and shaker in the tablet market, and other Android tablets have failed to even get near it. Shareholders will be waiting with bated breath when the iPad 3 is released to see whether OmniVision found its way inside.

The Foolish takeaway
Going by OmniVision's history of trumping the Street but faltering on outlook, the recent upbeat outlook comes as a whiff of fresh air. But I'm skeptical, because if its Apple relationship had really turned around, OmniVision would be the first one screaming it to the public. I'm content to wait and see.

To stay on top of the latest developments at OmniVision Technologies, add it to your Watchlist.

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. The Motley Fool owns shares of Apple. 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 (6) | Recommend This Article (5)

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 February 29, 2012, at 6:57 PM, CNQFool wrote:

    I don't necessarily agree with the comment that "OmniVision would be the first one screaming it to the public". Thats a sure fire way to ensure that they never supply for Apple again. I think the upbeat guidance is a positive sign that things may not be as bad as some people may expect and that is why I am long OVTI.

  • Report this Comment On March 01, 2012, at 9:51 AM, baystreet187 wrote:

    "But I'm skeptical, because if its Apple relationship had really turned around, OmniVision would be the first one screaming it to the public. I'm content to wait and see."

    Ovti has never screamed out about winning contracts with specific tier 1 suppliers, especially with AAPL since AAPL frowns upon that...

  • Report this Comment On March 01, 2012, at 11:25 AM, moore34 wrote:

    OmniVision products are used in the following:

    HTC Corp's (2498.TW) EVO

    Motorola Mobility Holdings Inc's (MMI.N) Droid X

    Nexus One X

    Asus Transformer Prime tablet

    http://bit.ly/yQK6D4

  • Report this Comment On March 01, 2012, at 11:49 AM, TechJunk13 wrote:

    @ icecube99- Kindly read-"The fall was triggered by the loss of its contract with smartphone giant Apple (Nasdaq: AAPL ) , which chose to use Sony's imaging sensors in the iPhone 4S, thus destroying OmniVision's monopoly in that area."

    It has lost its monopoly in imaging sensors and both sony's as well as omnivision's sensors are now used.And loss doesnt always mean a complete loss. A downgraded contract can be equated to a loss. If you dont get what you were used to, then you are at a loss.

    -Harsh

  • Report this Comment On March 01, 2012, at 9:11 PM, freakyguy666 wrote:

    YOUR ENTIRE ARTICLE IS THE EPITOME OF INCOHERENCE!

    Let's recap: Your article is titled "Don't Buy Omnivision's Outlook". By "Omnivision's Outlook" we must assume the outlook that OVTI has provided. They provided guidance WELL AHEAD of the Street's estimates for the current quarter, which caused the stock price to skyrocket. Your ENTIRE OPINION on not "buying" their outlook is supposed on your skepticism that they have won a slot in the iPad 3 because had they won, they would be "screaming it to the public".

    First, whether or not they have won a slot on iPad 3 is not necessarily a prerequisite for hitting their outlook for the current quarter (i.e. they may have won contracts with other customers to account for the increased guidance).

    Second, do you really believe the company to be so stupid as to provide guidance when they aren't confident they could hit it?? Are you suggesting that the company is intentionally attempting to defraud investors by providing false guidance?

    Finally, you must have no clue about the restrictions Apple imposes on their suppliers with regard to disclosing information. OVT had been a supplier for Apple for many years, and they have NEVER mentioned Apple to the public.

    Bottomline: Your article provides no basis for the title "Don't Buy Omnivision's Outlook" and is teetering on libel.

    Motley Fool is truly "foolish" to allow you to publish this incoherent pile of garbage and expose them to financial risk.

  • Report this Comment On March 02, 2012, at 8:43 AM, baystreet187 wrote:

    LMAO This is what happens when you let anyone blog... cap rating of 35, and an accuracy of 42... you have better ods betting against what ever he says..... #justsaying

    and this gets linked to the OVTI ticker on google and yahoo finance? just horrible... wonder how many inexperienced traders take in this dribble...

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