Himax Technologies' (HIMX -1.22%) third-quarter results turned out to be a mixed bag when the company reported on Nov. 9. The chipmaker beat Wall Street's estimates thanks to rising demand for its wafer-level optics (WLO) technology that's used to enable 3D sensing functions. However, weakness in other areas of the business led to tepid fourth-quarter guidance.
Still, the stock continues to trade close to 52-week highs. I think investors are right to keep the faith. Here's why.
Apple gives Himax a jump start in 3D sensing
Himax has made some big moves in 3D sensing chips of late. These depth-sensing modules enable cameras to create a 3D image that can then be used in an augmented reality (AR) setting. For instance, the Apple (AAPL 2.20%) iPhone X uses a TrueDepth front camera system that maps a user's face in 3D and unlocks the device based on a unique facial pattern.
Himax is one of the companies making this technology possible in the iPhone X with its WLO chips. So it wasn't surprising to see a spike in shipments of these chips was one of the highlights for the chipmaker last quarter. The company reported that it:
Started major ramp and shipment of the new WLO product, expects shipment to the same leading customer to accelerate significantly in Q4 2017 and beyond, working on multiple new projects with the same customer.
This indicates that Himax's WLO product sales could jump further in the future, driven by an increase in iPhone X production and the use of the technology across Apple's other products.
Apple is reportedly working on the inclusion of the Face ID feature in next year's iPad Pro models. This is a similar strategy to what Cupertino had adopted with the Touch ID feature, deploying it on the iPad Air 2 and the MacBook Pro late last year after first including it in the iPhone 6S.
Therefore, Himax's 3D sensing revenue is poised to get better next year thanks to the introduction of Face ID across more of Apple's products.
Catalysts beyond Apple
Apple is Himax's marquee customer right now, but the chipmaker isn't losing sight of the bigger picture. Management clearly stated on the latest earnings call that the company is going after the Android smartphone ecosystem with its 3D sensing solution portfolio in association with Qualcomm (QCOM -0.15%).
Qualcomm and Himax recently teamed up to develop 3D sensing solutions for both smartphones and automobiles. Both chipmakers are building a cloud-enabled camera system that will enable real-time 3D depth sensing across a variety of applications ranging from automotive, the Internet of Things, biometrics, and smartphones, among others.
This could be Himax's big opportunity in the 3D sensing space given Qualcomm's existing partnerships across several verticals. For example, Qualcomm's Snapdragon processors are currently used across 157 smartphones, so it has a strong channel of existing OEMs (original equipment manufacturers) to sell the 3D sensing chips it develops along with Himax.
The two companies will start mass-making their joint 3D sensing solution from the first quarter of next year. This coincides with Himax's forecast that leading Chinese smartphone makers will start launching flagship phones with 3D sensing capabilities from the first half of 2018. Therefore, Himax will have an opportunity to make an early move in the fast-growing smartphone 3D sensing module market that's expected to be worth $14 billion in 2020 as compared to just $191 million last year.
Not surprisingly, Himax is busy increasing its WLO capacity. It is currently constructing a new building to house the additional production lines. Moreover, Himax has also retrofitted its existing headquarters in a bid to house more equipment to manufacture WLO modules.
The company believes that all these capacity expansion efforts will help it make 2 million units of 3D sensing modules for Android smartphones initially, during the first quarter of 2018.
According to analyst estimates compiled by Yahoo! Finance, Himax's top line could jump over 25% next year after a 13% drop in the current fiscal year. The situation should get better in the long run as 3D sensing adoption gains critical mass, so it is not surprising to see analysts expect Himax's bottom line to grow at an annual pace of 25% over the next five years.
Investors, therefore, are doing the right thing by sticking to Himax shares despite a mixed showing last quarter.