Breaking This Google Glass Play Down

Himax Technologies (NASDAQ: HIMX  ) has been on a tear this year, appreciating close to 150%. The stock suddenly came into the spotlight earlier this year after it was revealed that it would be supplying a key component to Google (NASDAQ: GOOGL  ) for the Google Glass. And then, Google agreed to finance its display business last month.

It would be an understatement to say that shares have taken off after these events, as Himax's tremendous run has won it a few zealous supporters. But many seem to forget that the company had done well even before the Google Glass hype came into play, and early movers into the stock would now be sitting on nice gains.

But at this point, Himax looks like a risky investment, which is driven more by hype rather than fundamentals. The recently released second-quarter results served a reminder that the shares have run up too much and expectations have been placed at elevated levels, and the company's diversified business is being overlooked as Google Glass takes center stage.

Back to reality
So, it was not surprising when Himax shares fell in double digits after the company failed to meet the Street's revenue expectation in the previous quarter, and its guidance was way behind expectations. The company expects revenue between $182 million and $197 million, below the $219 million consensus.

Himax's display drivers are used across a variety of devices such as monitors, notebooks, TVs, tablets, smartphones, cameras, etc. and there's a possibility that you'll have a Himax driver in the screen on which you're reading this. So, before we move to the chatter about Google Glass, let's see how Himax's other business units are doing.

This is bigger than Glass now
Large panel display drivers contributed around 30% to the top line in the previous quarter, a steep decline from the 42% in the year-ago period. The drop in sales was due to reduced sales to Innolux, which disposed its equity stake in Himax, in addition to sluggish demand for televisions and laptops. The Chinese government terminated its TV subsidy program in May and this affected Himax.

However, Himax is expecting a slight reprieve in this business going forward, counting on panel makers from Korea and Taiwan. It should be noted that the company probably supplies its display drivers to the likes of Samsung (NASDAQOTH: SSNLF  ) and many others, which is probably a good sign or bad, depending on your perspective.

Samsung has been working on its OLED TVs and launched its first model in June. The Korean company has witnessed certain production issues, resulting in faulty TVs and higher costs, and resulting in a whopping $13,000-price tag for its curved 55-inch OLED television. Also, analysts (Chung Won-suk of HI Investment & Securities) are expecting a slow pick up in OLED TV sales and expect that it will be another two years before they are sold in decent numbers.

Moreover, DisplaySearch expects 600,000 OLED TVs to be sold next year, a figure which is expected to jump massively to 7 million in 2016. Himax has been enhancing its panel production capacity as it expects more business from panel makers.

Even this one's bigger than Glass
Coming to display drivers for small/medium-sized panels, this is where Himax has been witnessing rapid growth on the back of smartphones and tablets. This segment accounts for almost 54% of its top line and grew 32% in the previous quarter on a year over year basis. Strength in mobile devices along with automotive display applications have been the driving force behind this business.

But then, Himax management stated over the conference call that the short-term prospects of this business might be a bit soft. The transition by Chinese smartphone makers to newer models and inventory correction were headwinds. Himax also warned of price wars in budget smartphones that led to margin pressures, and eventually a loss of market share.

However, the company cites increasing screen resolutions as a positive and this is helping its margins in the high-end of the smartphone spectrum, where Himax claims that it is among the leaders. In addition, the company expects automotive displays and tablets to lead to further revenue gains in the future.

Glass is not the biggest in its own segment!
Finally, let's take a look at Himax's non-driver products segment. It accounted for 15% of overall revenue in the previous quarter, grew at a slower rate than small and medium sized display drivers, and yet, is the most watched segment because it houses LCOS microdisplays which are expected to be used in Google Glass.

But before moving to Google Glass, investors should note that in display drivers, the CMOS image sensors are the strongest performers now, accounting for the highest revenue in the segment.

Himax is witnessing robust demand for its 2 megapixel and 5 megapixel camera sensors from smartphone and tablet makers in China and abroad and recently launched an 8 megapixel sensor as well. The company is expecting growth from new smartphone customers this year and expects CMOS image sensors to grow at a brisk pace in the future.

What about Glass then?
And finally, coming to Google Glass, I think it won't be prudent to make big claims on how it is going to change the face of technology and send Himax's revenue through the roof. Well, Business Insider does estimate that Google Glass would be an $11 billion market by 2018, and there are rumors that the product will be priced at a reasonable $299 at the time of launch. These are certainly positives, but there are negatives as well.

Cheaper competitors can hurt Google while concerns about privacy, low battery life, and strain on the eyes are other things to keep in mind. So, pinning ones hopes on a product that hasn't hit mass market yet isn't a prudent thing to do. Google Glass can be a huge driver for Himax if it clicks, but for the time being, TVs, monitors, laptops, smartphones, tablets, automotive displays, etc. need to be paid attention to.

Don't be just a fanboy
Himax management stated that there is "relatively poor visibility" in its end markets. However, shares have become frothy and investors need to look at the actual business of Himax rather than counting on Google Glass to deliver the goods. There are challenges faced by Himax, such as price wars in smartphones and a shrinking large display driver business.

Moreover, revenue is expected to grow just 8% this year and the recent guidance suggests that there's a possible slowdown. So it won't be surprising if Himax faces some difficult times ahead and enters a period of correction, which again might be a good time to pick up some shares if the stock becomes a bit cheap relative to its growth as the long-term opportunity is still there.


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  • Report this Comment On August 23, 2013, at 2:21 PM, Hosana33 wrote:

    You seem to flip flop a bit in this article,and fail to mention institutional ownership was up nicely last quarter ending 6/30/13.I like the part when you say you will pick up shares at a lower price..Too Funny!

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