Himax Technologies (HIMX -4.98%) and Cypress Semiconductor (CY) might not be household names, but both chipmakers are invested in next-gen technologies. Himax makes key components for virtual reality (VR) and augmented reality (AR) devices, and Cypress produces niche chips that power smarter cars, industrial machines, and Internet of Things (IoT) devices.
Investors clearly favor Cypress over Himax. Cypress rallied more than 20% over the past 12 months, while Himax tumbled over 30%. However, past performance never guarantees future gains -- so let's take a fresh look at both stocks to see which one has more room to run.
What do Himax and Cypress do?
Himax generates most of its revenues from display driver ICs (integrated circuits) for smartphones, tablets, and monitors. A smaller percentage of its revenue comes from non-driver components for AR, VR, and 3D-sensing devices.
That smaller business produces LCOS (liquid crystal on silicon) and WLO (wafer-level optics) components. LCOS chips block light with reflective crystals in AR and VR headsets, while the WLO process shrinks optical chips for smaller camera modules.
Himax leads both markets, and its customers include Alphabet's Google, which owns a stake in Himax and uses its chips in Google Glass; Microsoft, which uses its chips in the HoloLens; and Apple, which uses its components in the iPhone X's depth-sensing camera. Himax also recently launched SLiM, a "3D sensing total solution" for smartphones, with chipmaker Qualcomm.
Cypress is the market leader in five high-growth niche categories: Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, auto instrument cluster microcontrollers, auto NOR flash memory chips, SRAM memory chips, and USB-C controllers. Most of Cypress' growth comes from the automotive and industrial markets, where smarter cars and machines require more semiconductors.
It also has a major foothold in consumer electronics with its USB-C controllers, as well as the IoT market thanks to its purchase of Broadcom's wireless IoT business in 2016. Cypress' core growth strategy, dubbed "Cypress 3.0", aims to turn the chipmaker into a "one-stop embedded solutions provider" for the IoT market.
How fast are Himax and Cypress growing?
Himax's core display IC business has been struggling with cyclically soft demand for LCD panels. The bulls previously believed that rising sales of its non-driver components would offset those declines as sales of AR and VR headsets rose, but various reports indicate that both markets aren't growing as quickly as investors had hoped.
Last January, Craig Hallum Capital Group analyst Anthony Stoss claimed that the ramp-up in AR probably wouldn't happen for another "two years." Microsoft still hasn't offered a release date for the consumer version of HoloLens, while the price cuts on Facebook's Oculus Rift, HTC's Vive, and Sony's PlayStation VR suggest that mainstream demand for VR headsets remains tepid.
Analysts expect Himax's revenue to rise 18% this year, mostly due to an easy comparison to its 15% decline in 2017; and for its earnings to grow 5%, compared to a 43% plunge last year. However, Himax expects "significant revenue and profit growth" this year on rising sales of its 3D sensing solutions, and it's expanding its production facilities to meet that demand.
Cypress expects demand for the auto and industrial markets to remain robust, although the bears often claim that tepid auto sales or macro slowdowns could throttle that growth. However, Cypress' content share gains, which are accomplished via bundling strategies, should offset any significant slowdowns. 80% of its revenues came from customers who bought "two or more" of its product families last quarter.
Cypress should benefit from the growth of multiple markets. Between 2016 and 2021, it expects its auto business to grow at a compound annual growth rate (CAGR) of 8%-12%, the total addressable market in industrial chips to grow at a CAGR of almost 10%, and the USB-C controller market to grow at a whopping CAGR of 89%. Wall Street expects those growth engines to boost Cypress' revenue and earnings by 7% and 37%, respectively, this year.
Valuations and verdict
Cypress trades at 14 times forward earnings, which is much lower than Himax's forward P/E of 30. However, Cypress' forward yield of 2.4% is slightly lower than Himax's 3.4% yield.
Cypress is clearly a better investment than Himax. Cypress pays a lower dividend, but its stock is cheaper. Cypress' growth engines are tangible, but Himax's growth engines are speculative. Most of Cypress' core businesses are growing -- but Himax's core display driver IC business remains a dead weight on its top line.