Chipmakers Himax (HIMX 5.23%) and Qualcomm (QCOM +1.70%) both experienced big price swings this year. Himax shares surged more than 70% on optimism about its growth potential in the augmented and virtual reality markets, but Qualcomm fell 20% on a seemingly endless streak of regulatory challenges.
I compared these two companies back in March, and believed that Qualcomm's lower valuation and higher dividend made it a better play than Himax. Since that conclusion was clearly wrong, I'm taking a fresh look at both companies to see if Himax is actually a better buy than Qualcomm at current prices.
Image source: Getty Images.
Himax: A rebounding Apple and AR play
Himax mainly supplies display driver ICs (integrated circuits) for monitors, tablets, and smartphones, which generated over 80% of its revenues last quarter. Demand for those ICs is cyclical, and softer industry demand caused double-digit annual revenue declines in its previous two quarters.
However, Himax has also been expanding into non-driver components for AR, VR, and 3D-sensing devices, which accounted for 20% of its revenues last quarter. In particular, its LCOS (liquid crystal on silicon) products use highly reflective crystals which can reflect or block light for clearer digital images -- making them ideal for AR and VR devices.
Alphabet's Google, which used Himax's LCOS chips in Google Glass, owns a 6% stake in Himax. It's also widely believed that Himax is supplying components for the depth-sensing cameras in Apple's newest iPhones.
Himax expects demand for its display driver ICs to accelerate in the second half of fiscal 2017, and rising sales of non-driver components to complement that growth. Analysts expect Himax's revenue to dip 12% this year but rebound 24% next year, while its earnings are expected to drop 69% this year but surge 236% next year.
Qualcomm: In the crosshairs of regulators and OEMs
Qualcomm is the largest mobile chipmaker in the world. Revenue from its flagship Snapdragon SoCs (system on chips) and baseband modems generated 75% of its revenue last quarter.
A Snapdragon 835 SoC. Image source: Qualcomm.
Sales of those chips rose annually during the quarter, with new flagship devices lifting sales of its top-tier Snapdragon 835, and cheaper devices boosting demand for its 400 and 600 series SoCs. However, the business still faces stiff competition from cheaper chipmakers like MediaTek and first-party chipsets from OEMs like Huawei.
22% of Qualcomm's revenue came from its wireless licensing business, which takes a cut (up to 5%) of the wholesale price of every smartphone sold worldwide. That high-margin business usually generates the lion's share of Qualcomm's pre-tax earnings, but it's recently been besieged by OEMs and regulators claiming that its licensing fees are too high, and that it unfairly leveraged its patents to force rival mobile chipmakers out of the market.
Qualcomm disputes these allegations, but it was already fined in China and South Korea, and faces unresolved probes in Taiwan, Europe, and the US. Some big OEMs, including Apple and possibly Huawei, recently stopped paying Qualcomm licensing fees altogether. Analysts expect these issues to cause Qualcomm's revenue and earnings to respectively fall 2% and 6% this year, and continue declining next year.
Comparing valuations and dividends
Himax's year-long rally boosted its trailing P/E to 87, which is much higher than the industry average of 24 for semiconductor makers. Its forward P/E of 51 also looks pricey, but that premium might be supported by its triple-digit earnings growth next year.
Qualcomm trades at 20 times trailing earnings and 13 times forward earnings, so it definitely looks cheaper than Himax and many other semiconductor companies. However, Qualcomm is also cheap because the unresolved issues regarding its licensing business -- which could derail its planned acquisition of NXP Semiconductors -- are too big to ignore.
Himax pays a forward dividend yield of 2.4%, but its payout ratio of 111% indicates that the dividend could be cut if its earnings don't rebound as expected. Qualcomm pays a forward yield of 4.4%, and its payout ratio of 83% looks manageable, but that percentage could spike if it can't resolve the issues plaguing its licensing business.
The verdict: Buy neither stock (for now)
I personally wouldn't buy either stock right now. I made a mistake missing Himax's rally the first time around, but I also think it's too late to get on board. The stock seems expensive, and I need to see a few quarters of year-over-year growth before I'm convinced of a turnaround.
Qualcomm looks like a cheap income play, but the current legal headwinds could throttle its bottom line growth. So for now, I'd rather stick with other mature tech stocks which face fewer fundamental risks.
