OmniVision Technologies, Inc. (OVTI): Did the Street Crush This Stock With Unrealistic Expectations?

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Predicting OmniVision Technologies, Inc’.  (NASDAQ:OVTI) outlook is like shooting at a moving target. You can never predict which route the stock will take after earnings since the company has never been consistent about its outlook, and this makes investing in the stock a very volatile proposition.

Hence, the fact that OmniVision Technologies, Inc. (NASDAQ:OVTI) once again guided way below Street expectations for the current quarter after upstaging them the previous two times shouldn’t come as a shock to investors. Even though the company’s revenue and earnings multiplied impressively from the year-ago period, the Street focused more on the missed outlook and the stock is down more than 10% as of this writing.

OmniVision Technologies, Inc. (NASDAQ: OVTI)Forgetting the good, focusing on the bad

OmniVision reported revenue of $423.5 million in the third quarter, a massive jump of 129% from last year and comfortably ahead of $411.4 million consensus. Non-GAAP earnings more than tripled from the prior-year period to $31.5 million or $0.56 per diluted share, battering the $0.41 consensus. But, an underwhelming outlook set the cat among the pigeons and investors started exiting their long positions.

The company calls for revenue of $300 million to $330 million in the ongoing quarter with earnings expected to be in the $0.14 to $0.29 per share range. The revenue forecast is light years behind the $375.4 million analysts were expecting, even though it signifies an impressive 45% jump from last year’s fourth quarter at mid-point.

OmniVision has been delivering solid revenue growth over the past year or so, but this seems to have given rise to really high expectations. It would have been miraculous if OmniVision would have satisfied the consensus outlook, but doing so after coming off a tremendously successful quarter seemed difficult.

Beyond the outlook

The company expects seasonality to affect its business this quarter, which is quite obvious since the company won’t have many catalysts like it had the previous quarter. It won’t have a new Apple Inc. (NASDAQ:AAPL) product to drive growth in the current quarter. Sales of the iPad mini, the fourth generation iPad, and the iPhone 5, for which OmniVision supplied camera sensors, have already peaked in the holiday season.

As Fool analyst Evan Niu had pointed out, Apple couldn’t have possibly eclipsed the December quarter’s iPhone sales in the ongoing one. Same applies for the iPad line, which grew 48% year over year and are one of the prime drivers of OmniVision’s revenue since it supplies sensors for both the cameras. Thus, like Apple, even OmniVision guided low as seasonality kicks in.

The forgotten positives

Panic-stricken investors might be dumping the stock, but those focused on long-term returns shouldn’t be doing the same. OmniVision has shown terrific revenue growth of late driven by its new and innovative imaging solutions. The company managed ship more units at a higher price in the quarter, driven by demand for 5 megapixel and 8 megapixel sensors which yield better margins.

As a result, OmniVision’s gross margin improved slightly to 16.9% on a sequential basis but was considerably below last year’s 24.2% as the company’s new products, such as the BSI sensors, involve a higher cost of production. The company witnessed an improvement in sales of higher megapixel sensors driven by increased demand for tablets and smartphones during the holiday period. Thus, as we enter a lean phase, it would be foolhardy to expect a high revenue growth rate from OmniVision.

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