* Omnivision presented at the JPMorgan Technology and Telcom Conference in San Francisco yesterday. We believe the company is on track for the April quarter. We noted two positives: * First, the CFO described the pricing environment as "not hostile". We are unable to discern a major change in the competitive landscape in the last three months; a perspective that may be validated by the CFO's comment. * Second, the CFO is beginning to see a refresh cycle for camera cellphones, as the market begins to shift from VGA to 1.3MP. The latter is now shipping in volume, and should help sustain ASPs and gross margins. We believe Omnivision has a relative competitive advantage at higher resolutions, being typically about 6-months ahead of its peers in terms of product cycle. * In addition, the company appears to be seeing good demand from VARS in the area of security and surveillance, and claims to be working with ten tier-1 OEMs in the automotive space, pointing to long-term growth drivers. * Reiterate Overweight Rating. Trading at 16.2 times CY04 EPS and 13.9 times CY05, the stock looks significantly undervalued relative to our EPS growth forecast and the stock's recent trading level.
Valuation and Rating Analysis We reiterate our Overweight rating for OVTI. Consistent with other stocks under our coverage, we are basing our valuation on CY2004 earnings projections at present. OVTI is currently trading at 16.2 times our revised CY2004 EPS estimate of $1.40, a 77% discount to our estimated 2003E-2007E net income CAGR of 65% (includes hyper-growth phase) and a 54% discount to its three- year historical average forward P/E multiple of 35 times (though multiples appear to be declining). OVTI is trading at just 13.9 times our CY05 forecast, however we do not believe this becomes a valuation consideration until we are into mid 2004 and have better visibility into end market demand trends. We acknowledge that OVTI's rate of revenue growth is beginning to decline, but we believe this is already priced into the valuation.
Risks to Our Rating Our view of OVTI could become more negative if competition intensified significantly in the context of slowing growth, inventory increases result in higher obsolescence risk, or some of the pending lawsuits went against the company. In addition, we would view operational disruption resulting from the relocation of testing to China as a negative. Finally, the company is exposed to supply chain risks that may prevent the company from meeting production obligations.