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OmniVision: Stay Away From This Value Trap

By Anders Bylund - Updated Apr 5, 2017 at 7:06PM

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This is not a pretty picture, no matter what chip you filter it through.

Usually, when I see a tech company with solid products and a bulletproof balance sheet getting its share price absolutely creamed, I salivate. That's often a ticket to huge returns. But in the case of OmniVision Technologies (NASDAQ:OVTI), I'm making an exception.

Revenue for the maker of digital camera chips fell 30% year over year to $164 million for the second quarter. Add in a $7.5 million goodwill impairment charge, and last year's $0.36 of earnings per share evaporated in a cloud of red ink -- $0.10 per share, to be exact. Great parlor trick, but it doesn't look good in an earnings report.

Management urged analysts not to panic, because the balance sheet is still strong, with $283 million in liquid assets and only $38 million in debt. And while OmniVision's customers "are being conservative, people are watching their own channels and inventories," according to sales Vice President Ray Cisneros, and the company's top-of-the-line chips with all-digital autofocus seem to be gaining traction in the market.

That's important, because it's a nifty feature that other camera sensor makers apparently haven't quite figured out yet. Not Kodak (NYSE:EK), nor Micron Technology (NYSE:MU), or even Texas Instruments (NYSE:TXN). That's what we call a competitive advantage here at the Fool.

Of course, you can have all the technology advantages you want and still lose money if nobody is buying camera phones. If I ran Nokia (NYSE:NOK) or Motorola (NYSE:MOT) these days, I'd certainly slow down my production lines until the recession is over. Given that OmniVision still bought back $13 million of its own shares last quarter and has that solid cash balance to fall back on, it seems like the company can survive a couple of lean years.

The buyback sort of makes sense. OmniVision's stock hasn't been this affordable since 2002, in the wake of the dot-com bubble. But, that doesn't mean you should buy it right now. Management gave guidance for a loss next quarter on slower sales. Add in a recession affecting the entire food chain -- consumer, phone producer, chip maker -- and investors buying today could be in for a bumpy, drawn-out ride. Ideal buying opportunity, this is not. (Did I just channel Yoda?)

Further Foolishness:

Nokia is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Yoda is going into time-out right now, and promises to stay out of Anders' articles for a few weeks. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

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Stocks Mentioned

Nokia Corporation Stock Quote
Nokia Corporation
$5.21 (0.00%) $0.00
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
$185.38 (1.82%) $3.32
Motorola Solutions, Inc. Stock Quote
Motorola Solutions, Inc.
$255.97 (1.46%) $3.69
Eastman Kodak Stock Quote
Eastman Kodak
$6.82 (6.90%) $0.44
Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$65.04 (4.37%) $2.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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