While 2009 was a very bad year for OmniVision Technologies Inc. (OVTI), there now appears to be reason for cheer.
Sell-side research is turning in favor of OmniVision, with JPMorgan (JPM) citing stability/increase in prices this year and Robert Baird reporting major design wins at two of the largest smartphone makers in North America and sole-supplier status at a leading PC maker.
The cell phone market, which includes smartphones, is OmniVision’s primary target and the company’s flagship Camerachip has enabled it to capture a dominant share of this market. However, the PC market, particularly notebooks, is the fastest emerging market, where the company appears to be taking share.
We are also positive about the acquisition of privately-held Aurora Systems, which OmniVision closed last month. Aurora develops Liquid Crystal on Silicon (LCoS) devices, which can be incorporated into any small electronic gadget for the purpose of video projection.
There has been much talk about pocket-size projection devices over the past two years that could throw up images on any conceivable surface for sharing among a group of people. While standalone devices will have their own market, industry analysts also expect a good amount of integration into new-age smartphones.
Shipments of individual and embedded projectors are expected to reach 1.7 million and 3 million units, respectively by 2012, according to iSuppli, and the first cell phone incorporating the technology only shipped this year. Therefore, there is significant growth potential for OVTI.
Aurora’s technology is adjacent to OmniVision’s core competencies. Therefore, the company might be able to sell the device to cell phone customers, thus driving penetration within the existing customer base. The acquisition also brings new engineering talent, which could be used by the company to develop applications for other emerging markets, particularly notebooks and security.
The Zacks Consensus estimate for 2011 reflects two analyst revisions for fiscal 2011 over the past 30 days, which effectively raised the estimate by 5 cents. New growth avenues, reducing dependence on the cell phone market and stronger pricing are the possible reasons for the 25.5% upside to the shares since the beginning of the year.
However, the near term outlook remains unexciting and we recall the weak guidance that management provided during the third quarter conference call.
Consequently, we reiterate our Neutral recommendation on OVTI shares.
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