This Chip Supplier Is Back in the iPhone

"Oh, I wish I wish I hadn't killed that fish!" exclaimed Homer Simpson in the classic time-traveling episode, "Treehouse of Horror 5."

That's how I feel about my bullish CAPScall and real-money position in OmniVision Technologies (NAS: OVTI) today. The stock is down 13% after Thursday night's fourth-quarter earnings report. I really wish I could start those positions fresh right now. The returns would be tremendous.

Wait, what?
Yeah, you heard me. I don't really mind that the stock's dropping like a rock here, because I'm certain that it will bounce back strong. My lament is all about a missed investment opportunity. Maybe it's time to shake down the couch cushions for spare change.

Why this bare-faced optimism in the face of market panic? Elementary, my dear Simpson: OmniVision just did exactly what I was hoping it would do, and the average investor is reading the signs all backwards.

Here's how I laid out the argument earlier this week: "Keep a close eye on OmniVision's guidance this time. Big revenue targets could mean that the company is back to riding Apple's (NAS: AAPL) iPhone coattails again."

And what did the company do? OmniVision's fourth-quarter sales of $218.5 million topped the analyst view by nearly 7%, and the midpoint of camera-chip designer's first-quarter guidance points 11% above the Street target. The undeniably great news was lost behind the ghosts of disappointing earnings, present and future.

Back to Cupertino
Read my lips: OmniVision is back in the iPhone.

In fact, I'm pretty sure that Apple has tapped a second-generation backside illumination chip, or BSI-2, for the task. Management noted that the advanced BSI-2 chips are expensive to make until the kinks are worked out of the manufacturing process. Hence, large orders of this product line will boost revenue but hurt gross margins, explaining both the sales upside and profit downside of the guidance at hand.

Some of the margin pain will go away as OmniVision works with chief chip supplier Taiwan Semiconductor Manufacturing (NYS: TSM) and other third-party manufacturing partners. That's just standard operating procedure in the chip industry. But BSI-2 is inherently more complicated than previous generations, so don't expect a magical snap back to record-level margins.

Word on the Street
Don't think I reached the iPhone conclusion lightly. OmniVision has burned me before, and I make sure to double-check my assumptions on the company nowadays. This time, I have a veritable Greek chorus of analysts behind me:

  • Omnivision's "prospect of winning the main camera socket in the next-gen iPhone seems promising," says Needham analyst Rajvindra Gill.

  • RW Baird is less bullish, but still optimistic. The firm thinks that OmniVision snagged the second-string contract for the next iPhone's main camera, not a coveted exclusive contract or even the first and biggest slice of the contract. Still, that should be enough to act as a "key driver for the shares."

  • Canaccord Genuity's Bobby Burleson takes a more general view. He sticks to a "buy" rating on OmniVision, "ahead of what we expect will be a strong ramp for revenue on new customer programs" in the second half of the year.

Analysts don't have any Magic 8-Balls or crystal Palantirs to unveil the future with 100% certainty. Still, it's reassuring to make a prediction, see it come true, and then have the backing of several smart people who study the same issues very closely.

Sony (NYS: SNE) landed a seemingly exclusive camera-chip contract for the iPhone 4S, but I'll be downright shocked if OmniVision doesn't make the cut this time. And that's where the stock price expands again, much like Homer Simpson's waistline at a doughnut and pizza buffet.

At the moment, Apple is the kingmaker of the smartphone industry -- iPhones ship in such ridiculous volumes that component suppliers live and die with Cupertino's choices. Our senior tech editor believes that Apple will keep playing this role for many years yet. He explains why in our brand-new premium report on Apple. If you want a broader picture of the smartphone revolution, find out why investors are so excited about this exploding trillion-dollar revolution.

At the time thisarticle was published Fool contributorAnders Bylundowns shares of and has created a written straddle position on OmniVision, but he holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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