OmniVision Technologies, Inc. (OVTI): Is This Stock Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does OmniVision Technologies, Inc. (NASDAQ:OVTI) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell OmniVision Technologies, Inc. (NASDAQ:OVTI)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at OmniVision Technologies, Inc. (NASDAQ:OVTI)’s key statistics:

OVTI Total Return Price Chart

OVTI Total Return Price data by YCharts.

Criteria 3-Year* Change Grade
Revenue growth > 30% 141.2% Pass
Improving profit margin 59.5% Pass
Free cash flow growth > Net income growth (99.6%) vs. 317.3% Fail
Improving EPS 314.7% Pass
Stock growth (+ 15%) < EPS growth (2%) vs. 314.7% Pass

Source: YCharts. *Period begins at end of Q1 2010 (January).

OVTI Return on Equity Chart

OVTI Return on Equity data by YCharts.

Criteria 3-Year* Change Grade
Improving return on equity 239.6% Pass
Declining debt to equity (42.9%) Pass

Source: YCharts. *Period begins at end of Q1 2010 (January).

How we got here and where we’re going
In spite of its share-price weakness, OmniVision Technologies, Inc. (NASDAQ:OVTI) has made nearly all the right moves over the past three years, earning six out of seven possible passing grades in the process. The vastly reduced free cash flow level should be of some concern, but OmniVision Technologies, Inc. (NASDAQ:OVTI) is currently clinging to a barely positive level of free cash flow, and as its debts have declined significantly, this shouldn’t be a major concern. What is of greater concern is whether OmniVision Technologies, Inc. (NASDAQ:OVTI) can make progress in an extremely competitive market. Let’s see how the company might succeed, and what might trip it up.

Let’s start with what’s tripping up OmniVision lately: expectations. The company can’t get by with first-quarter guidance that looks just good enough at best, especially not after blowing Wall Street away so impressively in the holiday quarter. Although OmniVision has diversified away from Apple Inc. (NASDAQ:AAPL), it hasn’t diversified quite enough. OmniVision holds about half of the tablet image sensor market, which lines up very well with Apple Inc. (NASDAQ:AAPL)’s share of the tablet market (estimated at 51% in 2012 and projected to drop to 46% in 2013, according to IDC).

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