OmniVision: When A Stock Crashes Too Much (OVTI, AAPL)

OmniVision Technologies Inc. (NASDAQ: OVTI) is supposed to be a great company.  It makes all of the chipsets for the cameras inside your smartphones and digital cameras.  Today is not great and it is not pretty.  Far from it.  The big damage is that OmniVision may have lost some of its Apple Inc. (NASDAQ: AAPL) business as it is a supplier of digital imaging chips for the iPhone.

The company’s stock price is down more than 30% on massive volume on its earnings report and its forecast.  Earnings may have actually more than doubled in the last quarter, but the coming quarterly earnings guidance was in a range of $0.52 to $0.64 EPS and with sales in a range of $255 to $275 million.  We had estimates closer to $0.80 EPS and over $305 million sales, depending upon which consensus estimate you use.

As New York is gearing up for a hurricane and as this is an other Summer Friday in late August, there have been very few formal research calls.  There will be more on Monday (or Tuesday if firms are hampered from the hurricane in New York). Lazard maintained an overweight rating but lowered the target to $37.00; J.P. Morgan maintained an Overweight rating but lowered its target to $36.60.

So, here is the big rub on OmniVision.  If you have followed this stock for years and years, you have learned one thing: it has big cycles, followed by big busts.  The boom went too high this time, but the bust is setting itself up for what may be too much of a bust as well after the dust settles in the days ahead.

Has the absolute bottom penny been seen?  Only if a monster bull market rally comes out of nowhere.  Experience dictates that even when the news looks like an overreaction that there is usually another drop after you see a 30% haircut in a day.  At issue is that this one had already lost one-third of its value before the earnings and guidance were offered.

Shares are down almost 32% at $16.93 and the stock hit a new 52-week low this morning.  The new adjusted 52-week trading range is $16.61 to $37.04.  At a reduced earnings forecast, OmniVision is trading closer to 7-times normalized earnings expectations.  The caveat is that it has to smooth out or normalize and that is a caveat that many investors say “That is a value trap rather than a value stock.”

Be patient on this one even if it is cheap.  The drop is too much on the surface, but that doesn’t mean that it won’t get cheaper.  These big drops rarely reverse themselves immediately and they tend to even drift lower.

In a bear market, cheap stocks often get cheaper.  This you can see in this week’s Major Tech Value Stocks Trading Under 10-Times Earnings.

JON C. OGG