More Downside in Store for This Google Glass Play

Google (NASDAQ: GOOGL  ) Glass component supplier Himax Technologies (NASDAQ: HIMX  ) has been facing tough times of late. The company has now missed the Street's revenue expectations in the last two quarters. If Himax's second-quarter results were weak and the outlook terrible, the third quarter was no different.

Failing, yet again
Himax once again failed to meet revenue expectations in the third quarter as growth slowed. The top line grew just 1.3% from last year to $192.8 million as sales of large panel display drivers plunged almost 25% from the year-ago period. Himax missed revenue estimates by a whisker, but a tepid outlook for the second time suggests that Google Glass has not come to Himax's aid yet and its traditional business is facing weakness. 

For the ongoing quarter, Himax expects revenue to be either flat or slightly lower than the third quarter, while analysts were expecting $208 million. Earnings are expected in the range of $0.075 to $0.095 per share, well-behind the $0.11 per share consensus at the mid-point. 

But even then, investors and analysts still seem to be bullish on Himax as it will be driving the technology of tomorrow -- head-mounted displays. They might be correct in their assessment. But when you consider that Himax trades at almost 27 times earnings and its top line growth has slowed down to a trickle, does it make sense to buy a stock on a hype known as Google Glass? Apparently not!

A break up of Himax's business shows that the non-driver segment accounts for less than 20% of total revenue. Now, this would be the segment that makes LCOS microdisplays that are expected to be used in the Google Glass, but for now, the Chinese smartphone market has been driving this segment's growth. 

A positive takeaway in the quarterly report was that the non-driver segment's revenue grew 30.5% year over year and Himax management is quite optimistic about the prospects here. Sales of its CMOS image sensors to tier 1 laptop manufacturers, along with smartphone and tablet makers, are expected to drive growth. In fact, Himax recently launched a new 8-megapixel sensor as it looks to attack higher-end mobile devices in China and Taiwan. 

A big opportunity...
Coming to head-mounted displays, Himax management stated that they are "working with numerous partners to create products targeting a wide range of applications, such as pico projector, head-up display for automotive application, and projector for home application." It claims to have landed multiple design wins at multiple customers for new head-mounted display projects, while also making early stage shipments for a customer's pilot stage production. 

This is, no doubt, an exciting opportunity as the head-mounted display market is expected to grow at a rate of 55% a year till 2019 to $9.28 billion, according to Transparency Market Research. On the other hand, Business Insider forecasts that Google Glass alone would be an $11 billion market by 2018. According to Business Insider, Google is looking at a mid-2014 launch of the device for the mass market. Comments from Himax management also indicate the same.

...but don't forget this weakness
Hence, if Google does start ramping up production of the Glass next year, Himax would certainly stand to gain. But, at the same time, investors shouldn't forget that the large-panel display driver business is declining. The segment still accounts for 30% of revenue, down from 40% in the year-ago quarter, but it is also weighing on Himax's growth. 

Sales of large-panel drivers might continue to remain weak going forward. The termination of China's TV subsidy program earlier this year, and weak demand for TVs, laptops, and monitors across the globe have been hurting this business. The extent to which Google Glass might help Himax offset this declining business is still unknown. Hence, investors have been pinning their hopes on an unknown variable that includes different factors such as the acceptance of Google Glass and Himax's content in each unit of Google Glass.

More downside in store
I agree that investments should be made on the basis of what would happen in the future rather than what has already happened. As such, many would have bought more shares of Himax after it dropped 9% following earnings. But then, we shouldn't ignore valuation metrics either. Himax is not a high-growth company yet and its revenue growth has slowed down as it contends with a challenging environment in its large panel display driver business.

Google Glass is still a year away and in my opinion, Himax might drop further, giving investors good opportunities to buy the stock at a reasonable valuation. Himax is down close to 15% since October and management's guidance suggests that more downside could be in store. As such, investors should wait for Himax to become cheaper before buying it to benefit from the Google Glass opportunity.

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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 November 14, 2013, at 3:11 PM, Trumpace wrote:

    Google glass is not a year away. The quarter did not have the Google factor since the deal between Google and HIMX closed in October.

    Also when pricing a stock one considers the potential and as progress toward the potential takes hold the price per share will reach the twelve month price target. Now if a company reaches ahead of time on fundamentals or falls short to warrant an adjustment, then a new one year target should be set. HIMX may have not come in right on the mark but it was not enough to warrant a change. If one looks at competitors they will see HIMX is still not reflecting full value and IMHO is more under valued.

    HIMX management has always been conservative in running the company thus why the company can handle a downturn better. In their conference call they mentioned other products they are working on with potential new customers. Could this be Apple, Samsung or Mircrosoft, we do not know because like the Google deal HIMX will keep it confidential until they prove their worth to the new customer and that is the right approach.

    Furthermore, HIMX works through its product cycles well and they are now entering the cycle with LCOS and they hold from what I read 75% of that market, making them the leader.

    Bottom line is I would not sell the company short as they are on the doorstep IMHO of being a great story.

  • Report this Comment On November 14, 2013, at 3:58 PM, jmcx24ever wrote:

    Readers - please do not let articles like this influence how you trade HIMX as an investment vehicle in your portfolio. Everyone knows these analysts have agenda's in stock manipulation. Not to mention, their predictions are as accurate as the groundhog's predictions. HIMX doesn't only rely on Google or their glass. They were a profitable company who met or beat earnings expectations in the last 4 quarters before Google invested so heavily in their technology. They have prospects with Sony, Microsoft and Samsung on top of Google. They are going to be a major benefactor in google glasses, Microsoft Xbox's, Samsung TV's & tablets, as well as Japanese cars and eventually American cars as well. You would be a fool to sell at this level. But you would be a bigger fool if you took stock recommendations from authors like this.

  • Report this Comment On November 14, 2013, at 4:33 PM, gtrrt wrote:

    Some people thought NBC report last night on google glass was good news, but some people wants to bad mouth it. I subscribe to Motley Fool and I did lost a lot of money on the Apple stock they suggest to buy. I doubt their words are that accurate at all.

  • Report this Comment On November 15, 2013, at 7:33 AM, CTProgrammer wrote:

    As a long-time investor in HIMX --- long before the glass hype --- I have heard these same arguments over and over again. I heard them at $3, $4, $5, $6 and so on at virtually every price level. While I do agree that practically ANY stock will have pull-backs for whatever reason, long-term you would have to be a fool to bet against this company. They are just getting started.

  • Report this Comment On November 15, 2013, at 9:20 AM, ramanitharan wrote:

    As per what the author said, HIMX is trading at a PE of 27 it is not warranted. May I know why Facebook trading at PE of 125 with earnings of 0.39?????? HIMX is earning o.35 as per Yahoo Finance and only trading at $9 while FB trades at $50?????? This author seems to live in a slumber land!

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