Himax Technologies (HIMX 0.56%) was a big surprise package last year. Shares of the chipmaker soared tremendously as its pivot toward making 3D sensing chips for use in smartphones boosted investor confidence, driven largely by a design win at Apple (AAPL -1.00%).
Himax's focus on making 3D sensing chips for the iPhone X helped it arrest the rate of decline in its revenue as the year progressed. But things took a turn for the worse as Himax shares crashed big time after an unsubstantiated tweet by Citron Research accused its management of fraud.
But savvy investors should treat Himax's recent drop as an opportunity to buy shares as it is on track to achieve a full-blown turnaround in 2018. Let me explain why.
3D sensing will be a big catalyst
Himax is aggressively investing in the augmented reality (AR) space, investing a lot of money to ramp up the production capacity of its wafer-level optics chips that are used in 3D sensing applications. The company's capital expenses during the last reported quarter increased almost fivefold on a year-over-year basis in a bid to meet "strong and urgent demand" from one of its customers.
This customer is apparently Apple, which is using Himax's technology to enable the Face ID feature in the iPhone X. Now, Himax's Apple business won't be restricted to just the iPhone X, as the chipmaker made it clear over the last conference call that it is working on several new projects with the same customer.
This could open up the floodgates for Himax as Apple is reportedly going to integrate the Face ID feature in its iPad lineup, and it won't be surprising if the feature finds its way into the Mac lineup as well. So, Himax's addressable market could expand rapidly in the near term thanks to its Apple partnership.
Moreover, Apple is expected to ramp up iPhone production by 16% in 2018.
Himax is also getting ready to take advantage of the potential demand for 3D sensing solutions in Android smartphones with the help of Qualcomm. The two companies had struck an agreement last year to develop 3D sensing chips for use in automotive and smartphone applications, whose mass production is expected to begin this year.
This could be Himax's ticket to the rapidly growing smartphone 3D camera market considering Qualcomm's clout in this space. Allied Market Research forecasts that this market is expected to clock a growth rate of 50% a year over the next five years, reaching $4.4 billion in revenue at the end of the forecast period.
Looking beyond smartphones
It won't be surprising if Himax's AR capabilities are used in applications beyond smartphones. The company has already illustrated that its 3D sensing chips can be used in retail applications with the help of Microsoft's HoloLens. Himax supplied chips for Microsoft's AR headset, and it was used by the likes of Volvo and Lowe's to help customers customize or visualize their products using AR before actually buying them.
Now, the HoloLens might have failed to make a dent in the market because of its high cost, but it did put Himax in the limelight in AR technology and helped it land a partnership with Qualcomm. This partnership will help Himax tap the lucrative automotive market as Qualcomm plans to use the former's expertise in developing heads-up displays (HUDs) for use in vehicle cockpits.
There's a lot of opportunity present in the HUD market as these devices are expected to be offered as standard in vehicles, pushing the market's size to $13.5 billion by 2025. So, Himax is making the right moves to grow its business in the long run.
Moreover, Himax is cheap with a price-to-sales ratio of 2.5 at the time of writing, as compared to the industry average of 4.6, which makes it an enticing bet given estimated annual earnings growth of 25% over the next five years.