Himax Technologies (HIMX 0.20%), a Taiwanese maker of display driver ICs and timing controllers, has been a volatile investment over the past 12 months. The stock hit nearly $11 last September, plunged to $5 in February, then rebounded to about $8.
That's because investors seem divided over Himax's long-term prospects. The bulls believe that its sales of components for 3D-sensing devices, augmented reality (AR) headsets, Internet of Things (IoT) gadgets, and other next-gen markets will offset its weaker growth in display driver ICs. The bears believe that thesis is too speculative and that its core business remains weak.
I personally believe that the bears could be right about Himax's future, for four simple reasons.
Source: Himax.
1. Its display driver IC business remains weak
Himax's display driver IC segment sells display drivers for both large panels, like monitors, and small to medium panels, like smartphones and tablets. Revenue from the large category, which accounted for 38% of its top line, fell 10% annually last quarter. Revenue from the small to medium category, which accounted for 43% of its sales, dropped 16%.
Himax blamed those declines on fewer working days in China and Taiwan during the quarter, a phasing out of older displays with certain customers, and an earthquake in Taiwan disrupting the production capabilities of multiple customers.
However, Himax notes that engineering collaboration and design-in activities with large panel customers remained "robust", and could spark a "future rebound in sales momentum." But Himax still has a lot to prove -- analysts expect its sales to fall 15% this year before rebounding 18% next year.
2. Technological shifts
Himax could also struggle to keep up with rapid technological shifts across the display market. Oppenheimer analyst Andrew Uerkwitz recently warned that Himax's display driver IC segment won't turn around anytime soon due to a market shift toward TDDI (touch and display driver integration), 18:9 displays, and OLED displays. Uerkwitz also expressed doubts that its growth in newer markets, like 3D sensing, could offset those declines.
Himax called Uerkwitz's comments "inaccurate and misleading". It pointed out that it was already shipping TDDI products, and that its new OLED drivers would ship before the end of the year. Himax also stated that it started shipping 3D scanning components in June, and that those shipments "will accelerate for the remainder of 2017."
3. Lots of iPhone speculation
Much of Himax's 35% rally this year was fueled by speculation that it would supply 3D-sensing components for the depth-sensing camera in Apple's (AAPL -0.57%) iPhone 8. Using a depth-sensing camera could add facial recognition and advanced AR functions to the phone.
Apple's orders could significantly boost Himax's sales of non-driver products, which fell 17% annually last quarter and accounted for 19% of its top line. That unit previously depended on the growth of AR glasses (like Alphabet's (GOOG 0.37%) (GOOGL 0.35%) Google Glass) lifting demand for its LCOS (liquid crystal on silicon) products -- but that fledgling market didn't live up to Himax's expectations.
In late March, Morgan Stanley analyst Charlie Chan claimed that Himax's 3D sensing components could account for 20% of its revenue by 2018, with Apple's orders accounting for a large percentage of the total. But it's all speculation at this point, since neither company has confirmed those rumors. Even if Himax supplies components for Apple, its 3D sensing business could still fail to offset declines at its display driver IC business.
4. Too much AR speculation
Himax bulls also believe that the return of AR devices could provide fresh growth for its non-driver business. Unfortunately, AR remains an even more speculative market than VR at the moment.
Google (which owns a stake in Himax) recently relaunched Glass as an enterprise device, but there's no guarantee that it won't flop again due to cost or privacy issues. Magic Leap, the AR start-up Google invested hundreds of millions in, has revealed nothing but misleading demo videos so far.
Microsoft's HoloLens is the most developed AR device at the moment, but rumors suggest that it won't be launched commercially until 2019.
Microsoft's HoloLens. Source: Microsoft.
Until then, the "AR market" will likely be confined to simpler mobile apps like Pokemon Go, which don't require the advanced 3D-sensing or LCOS components which Himax sells. In Himax's latest conference call, CEO Jordan Wu warned that LCOS revenue "will be flat sequentially and down year-over-year" due to discontinued shipments to one of its "leading AR device customers."
Wu stated that its LCOS revenue will come from a "more diversified customer base" later this year, but I personally doubt that a flood of new AR devices can move the needle for Himax anytime soon.
The key takeaways
I generally don't invest in supply chain plays, since they're often speculative, true customer names are obscured, big customers (like Apple) have tremendous clout in negotiations, and suppliers can abruptly fall behind major technological shifts. These flaws all apply to Himax, which investors should still consider a display driver IC play despite all the recent hype about iPhones and AR devices.
