Himax Technologies' (NASDAQ:HIMX) shares have done extremely well on the market over the past two months. A strong fourth-quarter earnings performance in February was followed by a report that the semiconductor specialist could become a key supplier for Apple's upcoming iPhone.

Not surprisingly, investors got excited and the stock soared, but the positive sentiment will be put to the test when the company reports first-quarter earnings on May 11. Here's what investors can expect from Himax Technologies' upcoming earnings.

A seated man in a suit, holding a tablet, with a smartphone and a cup of coffee next to him.

Image source: Himax Technologies. 

Revenue and earnings are expected to drop

Wall Street expects $163 million in revenue from Himax, a drop of almost 10% from the prior-year period, while earnings could go down to $0.03 per share from last year's $0.08. Analysts have dialed back their expectations as near-term headwinds and weak demand for some products will hurt the company's first-quarter revenue and earnings.

In fact, Himax forecasts that its gross margin will remain under pressure in the short run as revenue from high-margin products related to augmented reality (AR) starts drying up, along with pricing pressure in the core business.

As it turns out, one of Himax's key customers in the AR space scrapped their current-generation devices to develop more advanced products, causing a slowdown in the company's non-driver business. On the other hand, the chipmaker's core driver integrated circuit (IC) business was under stress as one of its large-panel driver customers adjusted inventory levels to account for weak demand.

In addition, China's smartphone market started slowing down in December last year in the run-up to the Chinese New Year celebrations, which could stop production from two to four weeks. Therefore, Himax's guidance was severely affected by seasonal factors, and that's going to hurt its first-quarter earnings.

What about the outlook?

Himax has a number of catalysts that could help it make a comeback, though they need to materialize sooner rather than later. For instance, the expected boom in AR adoption has made Himax quite hopeful about its non-driver business, which currently accounts for 17% of total revenue.

In fact, Himax is spending between $50 million and $55 million on the expansion of its wafer-level optics (WLO) and liquid-crystals-on-silicon capacity in anticipation of higher AR product demand from customers. The chipmaker claims that its WLO technology is already in strong demand, thanks to features such as 3D depth scanning and machine vision that can be used in verticals such as the Internet of Things and automotive.

Himax's WLO capacity upgrade will help it meet an expected jump in near-term demand from one of its customers, thereby boosting its revenue in the second half of the year. Additionally, the AR opportunity could be a long-term cash cow for the chipmaker as sales of related hardware could grow at almost 90% a year until 2024 -- according to a report from Grand View Research -- especially considering that the company has lined up 30 potential customers in this space.

Himax has taken advantage of the growing popularity of Chinese smartphones, as sales of related IC drivers climbed  25% year over year in the fourth quarter of 2016. What's more, strong smartphone shipments led to 22% year-over-year growth in its small- and medium-sized panel driver business last year.

The company shouldn't run into any more seasonal factors for the remainder of the year, as sales of Chinese smartphones are set to take off in 2017. Nomura forecasts that Chinese smartphone sales will jump 24% in 2017, which should boost Himax's small- and medium-sized panel drivers business that accounts for almost half of its total revenue.

Investors shouldn't be surprised if Himax's results turn out to be better than expected, though any delay in the production ramp-up by its customers could push back any potential gains. As a result, it makes sense to add Himax to your watchlist to see how its quarterly results and accompanying guidance turn out to be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.