More Downside in Store for This Google Glass Play

More Downside in Store for This Google Glass Play

Google Glass component supplier Himax Technologies has been facing tough times of late. The company has now missed the Street's revenue expectations in the last two quarters. If Himax's second-quarter results were weak and the outlook terrible, the third quarter was no different.

Failing, yet again
Himax once again failed to meet revenue expectations in the third quarter as growth slowed. The top line grew just 1.3% from last year to $192.8 million as sales of large panel display drivers plunged almost 25% from the year-ago period. Himax missed revenue estimates by a whisker, but a tepid outlook for the second time suggests that Google Glass has not come to Himax's aid yet and its traditional business is facing weakness.

For the ongoing quarter, Himax expects revenue to be either flat or slightly lower than the third quarter, while analysts were expecting $208 million. Earnings are expected in the range of $0.075 to $0.095 per share, well-behind the $0.11 per share consensus at the mid-point.

But even then, investors and analysts still seem to be bullish on Himax as it will be driving the technology of tomorrow -- head-mounted displays. They might be correct in their assessment. But when you consider that Himax trades at almost 27 times earnings and its top line growth has slowed down to a trickle, does it make sense to buy a stock on a hype known as Google Glass? Apparently not!

A break up of Himax's business shows that the non-driver segment accounts for less than 20% of total revenue. Now, this would be the segment that makes LCOS microdisplays that are expected to be used in the Google Glass, but for now, the Chinese smartphone market has been driving this segment's growth.

A positive takeaway in the quarterly report was that the non-driver segment's revenue grew 30.5% year over year and Himax management is quite optimistic about the prospects here. Sales of its CMOS image sensors to tier 1 laptop manufacturers, along with smartphone and tablet makers, are expected to drive growth. In fact, Himax recently launched a new 8-megapixel sensor as it looks to attack higher-end mobile devices in China and Taiwan.

A big opportunity...
Coming to head-mounted displays, Himax management stated that they are "working with numerous partners to create products targeting a wide range of applications, such as pico projector, head-up display for automotive application, and projector for home application." It claims to have landed multiple design wins at multiple customers for new head-mounted display projects, while also making early stage shipments for a customer's pilot stage production.

This is, no doubt, an exciting opportunity as the head-mounted display market is expected to grow at a rate of 55% a year till 2019 to $9.28 billion, according to Transparency Market Research. On the other hand, Business Insider forecasts that Google Glass alone would be an $11 billion market by 2018. According to Business Insider, Google is looking at a mid-2014 launch of the device for the mass market. Comments from Himax management also indicate the same.

...but don't forget this weakness
Hence, if Google does start ramping up production of the Glass next year, Himax would certainly stand to gain. But, at the same time, investors shouldn't forget that the large-panel display driver business is declining. The segment still accounts for 30% of revenue, down from 40% in the year-ago quarter, but it is also weighing on Himax's growth.

Sales of large-panel drivers might continue to remain weak going forward. The termination of China's TV subsidy program earlier this year, and weak demand for TVs, laptops, and monitors across the globe have been hurting this business. The extent to which Google Glass might help Himax offset this declining business is still unknown. Hence, investors have been pinning their hopes on an unknown variable that includes different factors such as the acceptance of Google Glass and Himax's content in each unit of Google Glass.

More downside in store
I agree that investments should be made on the basis of what would happen in the future rather than what has already happened. As such, many would have bought more shares of Himax after it dropped 9% following earnings. But then, we shouldn't ignore valuation metrics either. Himax is not a high-growth company yet and its revenue growth has slowed down as it contends with a challenging environment in its large panel display driver business.

Google Glass is still a year away and in my opinion, Himax might drop further, giving investors good opportunities to buy the stock at a reasonable valuation. Himax is down close to 15% since October and management's guidance suggests that more downside could be in store. As such, investors should wait for Himax to become cheaper before buying it to benefit from the Google Glass opportunity.

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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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