Why Shares of Omnivision Are Setting Up to Move Substantially Higher

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OmniVision Technologies Inc. (NASDAQ:OVTI) is a publicly traded company with a stock that is set to rocket higher. The company engages in designing, developing, and marketing semiconductor image-sensor devices worldwide. It offers CameraChip image sensors, which are single-chip solutions that integrate various functions such as image capture, image processing, color processing, signal conversion, and output of a processed image or video stream for use in various consumer and commercial mass-market applications. It also offersCameraCube imaging devices that are image sensors with integrated wafer-level optics.

The company supplies companion chips used to connect its image sensors to various interfaces, including the universal serial bus and other industry standard interfaces and companion digital signal processors that perform compression in standardized still photo and digital video formats. In addition, it designs and develops software drivers for Linux, Mac OS X, and Microsoft Windows, as well as for embedded operating systems like Android, Blackberry OS, Symbian, Windows CE, Windows Embedded, and Windows Mobile. The company sells its products directly to original equipment manufacturers and value-added resellers, as well as indirectly through distributors.

It serves mobile phone, notebook and Webcam, digital still camera, security and surveillance, entertainment, and the automotive and medical markets. Its recent performance suggests the stock could reward shareholders handsomely moving forward.

At first glance, the numbers for the company appear weak. Revenues for the fourth quarter of fiscal 2014 were $331 million compared to $352 million in the third quarter of fiscal 2014 and $336.2 million in the fourth quarter of fiscal 2013. GAAP net income in the fourth quarter of fiscal 2014 was $15.1 million, or 26 cents per diluted share, as compared to net income of $30.6 million, or 54 cents per diluted share, in the third quarter of fiscal 2014 and $8.9 million, or 17 cents per diluted share, in the fourth quarter of fiscal 2013.

Non-GAAP net income in the fourth quarter of fiscal 2014 was $23.9 million, or 40 cents per diluted share. Non-GAAP net income in the third quarter of fiscal 2014 was $40.4 million, or 69 cents per diluted share. Non-GAAP net income in the fourth quarter of fiscal 2013 was $17.5 million, or 31 cents per diluted share.

As we examine the total year, things look a little better. Revenues for the fiscal year ended April 30 were $1.5 billion compared to $1.4 billion million in fiscal 2013. GAAP net income for fiscal 2014 was $95 million, or $1.70 per diluted share, compared to GAAP net income for fiscal 2013 of $42.9 million, or 80 cents per diluted share. Non-GAAP net income for fiscal 2014 was $131 million, or $2.24 per diluted share.

Non-GAAP net income for fiscal 2013 was $79 million, or $1.41 per diluted share. GAAP gross margin for the fourth quarter of fiscal 2014 was 20.1 percent compared to 19.6 percent for the third quarter of fiscal 2014 and 17.5 percent for the fourth quarter of fiscal 2013. The sequential increase in fourth-quarter gross margin was primarily attributable to the introduction of newer and lower-cost products into its shipment mix.

Further strengthening the company’s position is its strong financial standing. The company ended the period with cash, cash equivalents, and short-term investments totaling $450.9 million, an increase of $57.9 million from the previous quarter. The increase was primarily attributable to cash provided by operating activities in the fourth quarter of fiscal 2014. 

CEO Shaw Hong said: “We are pleased to conclude our fiscal 2014 on a high note. Our financial metrics have continued to improve, with better gross margin, higher cash balance, and lower inventories. We have made meaningful progress on multiple fronts, including the diversification of our revenues into multiple geographies, especially in Asia, and the strong growth in our emerging automotive and security markets. We are also working on new technologies and applications in our core and emerging markets that have the potential to substantially enhance our market position over the longer term.”

When we look ahead to the company’s expectations for the future, we have a strong case for buying the stock. Based on current trends, the company expects revenues for the first quarter of fiscal 2015 to be in the range of $360 million to $400 million, and GAAP net income per share to be between 29 cents and 49 cents per diluted share. Excluding the estimated expense and related tax effects associated with stock-based compensation, the company expects its non-GAAP net income per share to be between 43 cents and 63 cents per diluted share. It is important to note that expects revenue of $360 million to $400 million, far above a $304.9 million consensus.

Further, earnings guidance of 29 cents to 49 cents is largely above a 29 cent consensus. Sales are set to improve and the company is anticipating rising gross margins into the future. With its customer base of Apple, Microsoft, Linux, and other major technology companies coupled with its improving fundamentals, Omnivision’s stock is setting up for a huge run. I rate it as a buy and assign a $31 price target.

Disclosure: Christopher F. Davis holds no position in Omnivision and has no plans to initiate a position in the next 72 hours.

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