Is Apple Supplier OmniVision Technologies, Inc. Still a Buy?

OmniVision scooted to multi-year highs after its latest report, and it looks likely to improve.

Jul 25, 2014 at 11:00AM

OmniVision Technologies (NASDAQ:OVTI) ended fiscal 2014 on a solid note. The company beat analysts' estimates handsomely, while the outlook also blew past expectations. As a supplier of image sensors to Apple (NASDAQ:AAPL), OmniVision has soared to multi-year highs this year. A look at its prospects and product innovation will make it clear that OmniVision can still scale greater heights.

Mobile prospects
The mobile devices market presents a significant opportunity for OmniVision. Increasing sales of low-cost 3G smartphones, as well as the transition to 4G LTE in China, are driving growth in the smartphone category. In addition, the upcoming iPhone 6 is another catalyst that's expected to result in stronger demand for the company's image sensors, although OmniVision's place in the yet to be released handset is unknown.

This is expected to be a blockbuster year for Apple, with analysts expecting the company to ship 180 million iPhone units. The iPhone maker is expected to deliver two devices this year, one with a 4.7-inch screen and another with a 5.5-inch screen. Bigger-screen devices are expected to help Apple improve its position in the smartphone market, as sales of larger devices have been on the rise.

China is one of the most important markets for big-screen phones, as 20% of all smartphones sold in China in 2013 were five inches or more, according to IDC. This share is estimated to grow to 50% in the next three years. Apple has entered into a deal with China Mobile, which will be an advantage for the smartphone maker, and will also expand OmniVision's addressable market.

OmniVision is focusing on innovation to tap the smartphone, tablet, and PC markets. It is working on new technology, such as 3-D depth information, using photography to get better image quality and transition to higher resolution. OmniVision is also developing new human interface applications, such as gesture control recognition and eye tracking. 

The company's new flagship, PureCel technology, is also gaining adoption. PureCel is expected to drive performance in smartphones and tablets with its light sensitivity, low power, and cost optimization. The company shipped about 200 million sensors in the fourth quarter, and is preparing to aggressively ramp up its PureCel sensor volume to address expanded market opportunities.

Prospects in the automotive market
Beyond mobile, the company expects the adoption of its technology in new products and applications to enhance its addressable market. OmniVision has been able to diversify its revenue base by moving into the automotive and security markets. For example, its OV10630 solution was selected by Tesla Motors (NASDAQ:TSLA) to enable advanced rearview camera applications a year-and-a-half ago. This is an important design win for OmniVision, as Tesla is the pioneer in the electric car industry.

The electric vehicle market in the U.S. grew 33% year over year in the first six months of 2014, with the Tesla Model S the fourth-highest selling vehicle. Going forward, Tesla is looking to add more models to its lineup. It recently idled its California plant to equip it with robots in order to boost production. Tesla is preparing to launch the Model X SUV, and it will also speed up the manufacturing of the existing Model S, according to Bloomberg.  This is good news for OmniVision, as it should see an increase in the addressable opportunity due to Tesla's expanding production.

Regulations should also drive OmniVision's prospects in the automotive market, apart from the fact that automotive OEMs continue to drive a significant increase in the number of cameras per car. The National Highway and Traffic Safety Administration recently released a federal mandate that requires all new cars less than 10,000 pounds, starting May 2016, to have a rearview camera installed. 

In addition, OmniVision has added distortion correction and light sensitivity to its automotive sensors. On the back of such product development moves, OmniVision can continue benefiting from the automotive market going forward.

OmniVision Technologies is focusing on key growth opportunities such as automotive and mobile devices. These markets are growing rapidly, and OmniVision is looking to tap both with its product innovation. Moreover, the stock is cheap at a trailing P/E ratio of 13, way below the 35 times industry average,which makes it an excellent long-term pick at current levels.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Apple, China Mobile, and Tesla Motors. The Motley Fool owns shares of Apple and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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