U.S. Markets closed

Himax Technologies Has Massive Upside Potential

- By Naman Shukla

Himax Technologies Inc. (HIMX) was a beaten-down stock in 2016 as it plunged over 26%. The decline was mainly due to the downgrade ratings from several analytics firms. In addition, the ratings moved the stock price to new 52-week lows of approximately $5 per share.

It looks like those downgrade ratings created a good buying opportunity for investors, however, as the stock is again headed back up. After reaching 52-week lows, the stock was upgraded to buy at Nomura. Moreover, a few days ago, the stock was upgraded to buy at Mizuho Securities. As a result, the positive effect of those buy ratings can be clearly perceived by looking at Himax's current stock price.


The company recently reported decent fourth-quarter results. In the fourth quarter, the company detailed earnings per share of three cents, missing the analysts' estimates by four cents. Revenue came in at $203.44 million, beating the estimates by $0.84 million.

Moving ahead, the revenue from large panel display drivers was $67.7 million, a surge of 9% compared to a year ago. The primary reason behind this growth was the robust demand from Taiwanese as well as Chinese panel customers.

Most importantly, according to a forecast report from marketintelreports.com, the worldwide display driver IC (DDIC) for TVs is projected to grow at a compound annual growth rate (CAGR) of 19.54% from 2016 to 2020. Considering the positive outlook of the market, it appears Himax is well positioned to benefit in the upcoming years as it accounts for one of the key vendors.

On the other hand, the company's gross margin in 2016 was 24.2%, a surge of 60 basis points compared to that in the prior year. The surge in gross margin was mainly due to the escalated liquid crystal on silicon (LCOS) and wafer level optics (WLO) shipments for augmented reality (AR) applications as well as definite engineering fees from VR and AR new project engagements.

While VR and AR is still in its early stages, the escalating demand for virtual and augmented reality in gaming, education, health care and several other segments around the globe is likely to accelerate their adoption in the coming years.

Conclusion

Although Himax Technologies disappointed investors in 2016, it has displayed strong signs of upward momentum this year. Moreover, the adoption of Ultra HD and 4K TVs is growing at a strong rate, which is certainly a positive thing for the company going forward.

Apart from this, VR and AR look like the next big thing in the tech industry, and Himax Technologies appears to be in great position to benefit in the future. The company, however, expects its gross margin to plunge in the next quarter due to incessant pricing pressure and lower revenues from the high-margin VR and AR segment.

Consequently, investors looking to buy the stock should wait for the right time to initiate a position since the company's underwhelming expectations will likely pull down the price.

Disclosure: I don't hold a position in the stock mentioned in this article.

Start a free 7-day trial of Premium Membership to GuruFocus.

This article first appeared on GuruFocus.