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Is OmniVision Technologies Great?

For every stock out there screaming "Buy me!" others simply give us a nudge and a nod. While their five-star peers get all the attention, we can sift through Motley Fool CAPS to find four-star stocks giving us the sign that they're on the path to greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. This time out we'll take a look at image-sensor maker OmniVision Technologies (Nasdaq: OVTI  ) , perhaps a less obvious source for tomorrow's great buys.

OmniVision Technologies snapshot

Market Cap $877 million
Revenue (TTM) $880 million
1-Year Stock Return (7.0%)
Return on Investment 2.8%
Estimated 5-Year EPS Growth 15.0%
Dividend and Yield N/A
Recent Price $16.39
CAPS Rating (out of 5) ****

Source: N/A = not applicable; OmniVision pays no dividend.

Of course, just because the 180,000-member CAPS community has chosen this stock as one being on the road to greatness, that doesn't mean you should buy in, too. Due diligence is still required, but let's see why they think it might merit your attention.

In the sight of greatness
You could say Apple (Nasdaq: AAPL  ) is getting less secretive about its products now that Steve Jobs is no longer at the helm. In an ad announcing its new product launch on Sept. 12, the date cast a shadow of the number "5," suggesting it was going to be the iPhone 5 that was making its debut (though everyone was already expecting as much).

Then at the launch event itself, Apple displayed a picture of its A6 memory chip and chose not to conceal the markings on it, which allowed tech site AnandTech to figure out that it was from Samsung and would provide 33% more peak memory bandwidth than the iPhone 4S. It won't be long before there are more iPhone 5 teardowns and we'll be able to see which components suppliers are the big winners.

A clear picture of growth
By most accounts, OmniVision will be one of them. Last year's fiscal fourth quarter's earnings report disappointed and showed what happened when Sony displaced one of OmniVision's image sensors for a coveted slot in the 4S. However, because Omni also said it was ramping up production of its backside illumination chips, it indicated a big win for the next-generation phone. Because they're expensive to make, OmniVision also cautioned margins could slide, but volume would probably make up for it, which further fueled speculation.

The first-quarter report showed the upside potential, as guidance suggested it wrested control of the slot from Sony once again.

Other suppliers have also ramped up production for various components. Cirrus Logic (Nasdaq: CRUS  ) , for example, forecasted huge sales growth in the second half of the year, with 70% to 90% growth in the third quarter and a similar advance in the fourth. Cirrus derives more than half of its revenue from Apple.

There was also hope that Apple would launch its iPad mini at the same time, since there were indications it would happen. TriQuint Semiconductor and Skyworks Solutions didn't join in the irrational exuberance of exponential sales growth since iPads don't use their parts.

A surfeit of sales
Apple broke previous first-day sales records, booking more than 2 million orders for the iPhone 5 in the first 24 hours. With analysts trying to outdo each other by guessing just how many iPhones Apple will sell (Barclays says 45 million by the end of the year; Bloomberg, 58 million; and FBR Capital Markets, 250 million in total), it's clear that OmniVision will come out ahead regardless of the certain presence of some negative Nancys.

At just 10 times earnings estimates, the image-sensor maker doesn't seem to be expensive, and with its enterprise value trading at less than 10 times the free cash flow it generates, OmniVision looks incredibly cheap -- even after bounding 38% higher off its July lows.

Value is what you get
With Apple only wanting the best in its products, CAPS member 1Patient1 believes it signals OmniVision is a company operating at peak performance: "[OmniVision] will continue to grow by providing innovative products to the ever changing [smartphone] and tablet market."

I've already rated the chip maker to outperform the broad indexes on CAPS, but tell me in the comments box below whether expectations for OmniVision Technologies are so high the slightest deviation from the path will send it plummeting.

A great opportunity for you
Don't forget to sign up for our new Apple research service, which comes with a bonus iPhone 5 report on how investors can profit on the new device. Sign up today and receive free updates for a year.

Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of TriQuint Semiconductor and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (4)

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 19, 2012, at 11:46 PM, botfeeder wrote:

    What makes me wary of OVTI is that they sell chips that they have manufactured by semiconductor foundries.

    How much intellectual property does OVTI truly have that provides a barrier to entry for other companies wishing to sell similar products?

    That is a general concern I have with fabless semiconductor chip companies. However, some would appear to have a large amount of proprietary intellectual property embedded in their products- for example software that has been developed over a number of years.

    But it seems to me that with imaging chips a large share of the intellectual property is the fabrication process of the chip foundry OVTI uses. No doubt there is some intellectual property specific to OVTI in its products, or else joe blow would be selling equivalent chips. Still, I am concerned whether there is enough OVTI-specific IP in their products to provide some protection against competition.

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