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Is This the Next Rule Breaker?

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You wanna know the secret to OmniVision Technologies' (Nasdaq: OVTI  ) success?

Some might call it innovation. Others would point to taking calculated risks. But what it all boils down to in the end is the first-mover advantage. I'm actually a little bit surprised that OmniVision hasn't made it into our Rule Breakers service yet because the stock is almost a perfect match for the basic Rule Breaking template:

Rule Breakers Dictum

How OmniVision Stacks Up

Top dog and first-mover in an important, emerging industry

Digital camera chips are everywhere these days, and OmniVision's products are becoming the industry standard. Why? Read on.

Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors

Sony (NYSE: SNE  ) and Panasonic (NYSE: PC  ) , among others, gave up on back-side illumination camera sensors years ago because they were too expensive to make. OmniVision stuck with the technology, developed a commercially viable manufacturing process, and now has a lead of at least a couple of years in this next-generation technology.

Strong past price appreciation

The stock has gained 150% in 12 months and a staggering 417% over two years. I think that qualifies.

Good management and smart backing

It takes some nerve to risk the company's future on an expensive and unproven technology bet and then succeed where larger rivals failed. But that's exactly what OmniVision did. In my book, that's a strong sign of management that works hard to make the most of its assets.

Strong consumer appeal

OmniVision's BSI chips are a part of Apple's (Nasdaq: AAPL  ) iPhone 4 success story. Need I say more?

Proof that it is overvalued according to the financial media

The stock trades at an elevated 31 times trailing earnings today, even after accounting for last night's brilliant second-quarter report. Fellow Fool Rich Smith called an end to OmniVision's growth story on Monday. Heck, I've called OmniVision overvalued myself, as recently as last summer.

All of this added up to a 24% sequential hockey-stick revenue spurt to $240 million in the second quarter, based on strong BSI orders and more design wins. Non-GAAP earnings more than doubled year over year to $0.58 per share. Without going into specifics, management says that "OmniBSI has been adopted in the marketplace by all tier 1 customers in all segments." Using Apple as a springboard to reach other tier 1 customers like Dell (Nasdaq: DELL  ) , Motorola (NYSE: MOT  ) , and Samsung is just smart business, and is a proven strategy that is already working wonders for Cirrus Logic (Nasdaq: CRUS  ) .

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Apple is a Motley Fool Stock Advisor pick. The Fool owns shares of Apple and Cirrus Logic. 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. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (2) | Recommend This Article (11)

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 December 01, 2010, at 5:33 PM, vhenry wrote:

    The all time high on omnivision was in Dec of 2003 a pre split price of $67.66 or in todays dollars $33.83. Todays high is still $2.46 short of that price so if you bought in Dec of 2003, you still haven't made a penny on your investment. If you bought 2 years ago at $5.00 you made a killing. Is it a Rule Breaker? I'm not sure however I am along for the ride. With customers changing their phones yearly, the digital lens along with the phone has become a consumable and as long as Omnivision is hiched to that market it should continue to do well and eventually move well past it's all time highs.

  • Report this Comment On December 01, 2010, at 6:10 PM, JBKirtley wrote:

    Based solely on what I've read in the article and vhenry's post, all I can really say the management should be commended for sticking with and idea until they developed a profitable product - everyone wants management with skin in the game and a no quit attitude. But, how long can OVTI ride this horse? Nothing in the article says anything about innovation and my understanding of a rule breaker is a company the rest of the industry is chasing but remains out of reach. Tell me what's things look like going forward with respect to R&D or outside the box thinking and then I'll decide if I think this company is going to break any rules.

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