Why Himax's Bad Days Will Continue

Himax Technologies had a good time last year on news that it will be supplying LCOS microdisplays to Google for Google Glass. But the stock had gotten ahead of its fundamentals, and investors were buying more shares under the belief that Google Glass will lead Himax to the promised land. Despite a slowdown in revenue and a string of bad quarterly results, Himax shares climbed higher. But those days are over.

Facing the reality
Toward the end of last year, it was clearly evident that Himax will drop, and the company's fundamentals will eventually catch up with the stock price. In 2014, Himax is down 17%. Moreover, Bank of America put out a massive downgrade when it cut Himax's rating from buy to underperform, delivering a crushing blow to Himax investors who were betting on Google Glass. The stock crashed 16%, and with the way things stand, that could continue south.

Himax is trading at 33 times trailing earnings, despite the beating that it has taken this year. For a company that reported just a 2.40% jump in revenue in the previous quarter and a 7.20% increase in earnings, this is an expensive valuation. In fact, for the whole of 2013, Himax reported $770.7 million in revenue, up just 4.5% from the previous year. Thus, the stock kept on rising based on optimism about Google Glass, while financial growth stagnated.


More than just Glass
It seems like no one has been paying much attention to Himax's current bread-and-butter businesses. Large-panel display drivers have been struggling, and that business was down 25% in 2013. Looking ahead, Himax expects "some growth" in this segment in the short term, due to new customers. Himax is pinning its hopes on higher sales of 4K televisions this year.

According to NPD DisplaySearch, manufacturers of 4K TV LCD panels are looking at strong sales in 2014, with shipments slated to rise to 12.7 million units from an estimated 1.9 million units last year. China is the leader in 4K TV sales with around 80% of shipments, and since Himax has numerous China-based manufacturers as clients, it could see a turnaround in its large-panel business.

But Himax's small-panel drivers have been growing at a brisk pace, primarily due to smartphone sales in China and the rollout of LTE in the country, which will lead to higher demand for handsets. Himax is looking at better margins from sales of high-resolution panels, but this will be offset by low-end smartphone panel sales.

There is intense competition in the budget smartphone market in China that could result in margin erosion. Himax will be employing cost-reduction measures to support its margins, but if things don't turn out as planned, Himax's earnings could take a hit, as the small and medium-sized display panel business accounts for 54% of overall revenue. 

The heart of the matter
What's most surprising is that Himax's non-driver products business -- with 16% of overall revenue -- is why investors are betting big. Himax manufactures image sensors and LCOS microdisplays through this segment, which means that it will be the biggest beneficiary of Google Glass in the future. However, success is never guaranteed, and the commoditization of the image-sensor market, where there are bigger companies such as Sony and Samsung, could trouble for Himax.

The company is already seeing margin pains in this segment due to oversupply, and there could be more trouble this year, as Google won't be releasing Glass anytime soon. Google is still working on making the design of Glass more acceptable, so that people wearing it don't look like sci-fi movie characters. As such, it has teamed up with Luxottica , the maker of Ray-Ban and Oakley, to make them look "normal." 

Moreover, Luxottica's retail outlets should help Google get Glass sales off the ground. However, given the premium nature of Luxottica's brands, Google Glass might not be a mainstream product anytime soon. Also, it could cost more than a high-end smartphone without delivering the full functionality of one. This will be a big deterrent, since Luxottica's sales are being driven by the emerging markets, where a high-priced Google Glass has a high chance of failure.

The bottom line
There is no certainty as to how much the Google Glass will sell once launched. So, Himax investors should focus more on the company's fundamentals rather than get emotionally attached with it. Himax could be a great growth story once again, if Google Glass clicks, but until then, it won't be surprising if it continues to go south.

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The article Why Himax's Bad Days Will Continue originally appeared on Fool.com.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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