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Up Over 80% in 2017, Is Himax Technologies a Buy?

By Nicholas Rossolillo - Oct 1, 2017 at 9:30AM

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The Taiwanese chipmaker has nearly doubled on optimism surrounding new smartphone models to be released later in the year.

Shares of Himax Technologies (HIMX 2.34%) are having a great run this year, as the chipmaker's work on new tech devices is expected to reap solid results. But after such a big run-up in 2017, is taking a position in the company now still a prudent decision?

HIMX Chart

Data by YCharts.

New smartphones with new tech

Earlier this year, sales were trending downward, and the company's lack of scale hurt profitability. Though its bread and butter is making drivers for displays on smartphones, tablets, and TVs, the blame was laid primarily on the non-driver business, which includes augmented and virtual reality (AR and VR) chips.

HIMX Revenue (Trailing-12-Month) chart

Data by YCharts.

But the recovery has been swift, as sales are picking up again in preparation for the holiday shopping season. TV driver sales are on the mend, sales to automakers continued to grow unabated, and a slew of new smartphone releases slated for this fall should help the company in its current quarter.

Besides the top line rebound, a lot of excitement was generated around Himax' new 3D-sensing technology, which is also filed under the non-driver business. Expected to receive wide adoption across the next generation of smartphones being unveiled, 3D sensing is a key component in enabling AR and VR in devices.

Himax management was optimistic about its prospects, saying they would ramp up production in this new area to meet the needs of a large unnamed customer (read: Qualcomm). As a result, the company enjoyed an even greater tailwind in the third quarter, with an expected 23% to 30% increase in sales from the previous quarter.

Himax has been here before

This isn't the first time that management at Himax talked up huge prospects for emerging technology in its non-driver business. This is something that an analyst at Oppenheimer also pointed out, arguing that past failures to deliver don't justify the bullishing trading in Himax shares this year.

The analyst was referring to the Microsoft Hololens project, which relied in part on Himax chips. The AR device designed for the workplace didn't take off as expected -- the technology isn't yet refined enough for employers to justify the price tag.

The Microsoft HoloLens, which looks like a helmet with a crown. The big goggle-like display sits on a headband to allow the device to be worn by users in a variety of applications.

The Microsoft HoloLens, powered in part by Himax. Image source: Microsoft.

Himax shares shot up on speculation that the AR/VR industry was going to explode, only to come crashing down when the news broke that Microsoft was scaling back on the project. Other growth in AR and VR has been lackluster thus far.

In the company's defense, smartphones are a slightly different story. The devices have been thoroughly adopted around the world, to the point that most of us can't imagine not having our phones constantly by our sides. Wearing an AR/VR-enabled helmet, though ... not so much.

The widespread adoption of 3D sensing technology in smartphones has a higher probability of success than the completely new concept of an AR helmet, which means that the improving results (and rising stock price) this time could be the real deal for Himax.

To buy or not to buy

It's important to remember that all of this is still speculation. The initial surge in new orders for Himax' new tech could have legs, or the numbers could come crashing down once again as they did last year. With the stock up over 80% year to date, investors are already expecting a big quarter as management has forecast. I (for one) am not interested in chasing the existing gains at this level of uncertainty.

Back in February, I called the pessimism surrounding Himax overdone -- now, the pendulum has swung in the other direction. I'd look for another pullback in the stock before considering a purchase.

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