Omnivision (NASDAQ:OVTI) shares have been walloped since early May, having fallen by nearly 50% from their peak near $35. This is probably due to a number of factors, including the tough market environment for semiconductor stocks and the emergence of competition from some much larger companies like Micron (NYSE:MU), STMicroelectronics (NYSE:STM), Toshiba, and Samsung.
While these are sure to be some tough competitors, Omnivision may be able to hold its own due to what I believe was a shrewd move -- its 2005 purchase of CDM Optics from Boulder, Colo.
Omnivision is a supplier of CMOS image sensors, which are widely used in camera cell phones and are finding increased use in automobiles, medical applications, security and surveillance systems, and even toys. CDM Optics has developed a unique technology called Wavefront Coding that provides some significant advantages over standard imaging systems.
Whereas most imaging systems use lenses to focus an image on a detector, Wavefront Coding splits the imaging function between a lens system and some electronics. In this system the lens deliberately blurs the light, which results in a larger depth of field. The CMOS sensor detects the blurred light and the electronics remove the blurring. Big deal, huh?
Well, here is why it matters. Although most digital cameras have an autofocus function, it takes time for the lens to achieve a proper focus, meaning that sometimes you can miss a shot, especially if you are taking photos of quickly moving subjects like, say, three-year-old kids. It is also possible that you can take a picture and later find that the wrong part of the field of view was in focus. For example, your smiling Aunt Thelma is blurry, but the old dying tree behind her is in perfect focus. Since Wavefront Coding increases the depth of field by a factor of five to ten, these problems are significantly reduced -- you don't have to wait for the lens to focus properly before your shot.
If you are a photography buff, you know that the standard way to increase the depth of field in a photograph is to stop down the camera -- basically you block off the edge of the lens and allow light to pass only through the center. The disadvantage of increasing the depth of field this way is that the amount of light hitting the film or image sensor is reduced, which means that you have to do a longer exposure to avoid a dark image. Wavefront Coding eliminates this problem also.
One last big advantage of Wavefront Coding is that the lens system can be simpler. This should allow mobile phone designers to be more innovative, since the lens system can be more compact and less expensive.
Omnivision's balance sheet is rock solid with no debt and $350 million of cash, which amounts to roughly a third of the entire market cap. After the recent price contraction, the shares now are changing hands below $19, which gives it a trailing-12-month P/E ratio of 12. This seems to me like a pretty low price to pay for a promising technology.
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Fool contributor Dan Bloom welcomes your comments. He owns shares of Micron. The Fool has an ironclad disclosure policy.
