2023-09-28 03:14:01 ET
Summary
- Himax Technologies is a semiconductor solution provider specializing in display driver ICs and related products for screen-enabled devices.
- The company is venturing into innovative technologies like LCoS microdisplays and AI-driven devices to tap into emerging markets.
- HIMX's 2022 revenues declined by 22.3%, highlighting its susceptibility to macroeconomic fluctuations, and a valuation model suggests a potential 59.3% downside for the stock.
- Still, I advise against shorting it, given the ever-present possibility of macroeconomic conditions pivoting in HIMX's favor.
Since 2001, Himax Technologies Inc. (HIMX) has strategically navigated the semiconductor landscape, particularly in display imaging processing technologies. Key milestones, such as its NASDAQ listing in 2006 and timely acquisitions, reflect the company's adaptability and alignment with technological trends. While HIMAX's primary strength is developing components for a diverse range of screen-enabled devices, its ventures into innovative domains like LCoS microdisplays and AI-driven devices underscore its forward-thinking ethos. However, the pronounced 22.3% decline in 2022 revenues is a cautionary tale of the company's susceptibility to macroeconomic fluctuations. My valuation model points to a potential 59.3% downside for HIMX, suggesting that investors tread cautiously. Despite the company's robust foundation, the current stock valuation seems stretched. However, it's wise to exercise restraint and not short the stock, considering the unpredictable nature of the industry and the potential for favorable macroeconomic shifts that could benefit HIMX.
Business Overview and Tech
Since 2001, Himax Technologies Inc. has grown into a global leader. HIMX's 2005 decision to create a Cayman Islands holding company, leading to its NASDAQ listing by 2006 , wasn't just about compliance but a deliberate move for global prominence. Also, the series of M&As that happened subsequently further shaped the company.
Today, HIMX is a semiconductor solution provider specializing in display imaging processing technologies. The company designs and produces display driver ICs and related products, integral components for various electronic devices, including TVs, laptops, mobile phones, and VR devices. These chips essentially act as the "brains" behind the screens, enabling them to display images and videos. Manufacturers of electronic devices with screens are the primary customers for HIMAX, purchasing these chips to incorporate into their products. The significance of HIMAX's offerings cannot be understated, especially considering the ubiquity of TFT-LCD panels in today's digital devices. Given screens' central role in modern electronics, the demand for high-quality display drivers will likely remain robust. This context positions HIMAX favorably in the market, as their products are supplementary and fundamental to the functionality of a vast array of consumer electronics.
Moreover, HIMX aims to diversify into non-driver products. This initiative includes ventures into Liquid Crystal on Silicon (LCoS) microdisplays, CMOS image sensors, wafer-level optics (WLO), 3D sensing, and ultralow power smart image sensing. The applications of these technologies are vast and futuristic, spanning augmented reality devices, projectors, facial recognition systems, and AI-driven devices. This diversification strategy is not just a bid to expand its product portfolio but a forward-thinking approach to tap into emerging markets and technologies. The potential of these technologies, especially in sectors like augmented reality and AI-driven devices, is immense. However, the road to innovation is fraught with challenges.
The market in which Himax Technologies Inc. operates exhibits growth potential driven by increasing demand for electronic devices, evolving display technologies, expansion into new markets, global market opportunities, a competitive landscape, and technological convergence. However, it's crucial to acknowledge the challenges and uncertainties of this growth. As I'll explain later, HIMX's business appears to be incredibly sensitive to macroeconomic cycles.
HIMX's Return to the Mean and Valuation
HIMX's recent financial performance provides insights into the changing dynamics of its market environment. In 2022, the firm experienced a notable 22.3% decline in revenues, amounting to $1.2 billion . This downturn can be attributed to unexpected lockdowns in China, geopolitical tensions, and overarching macroeconomic challenges. Additionally, the prolonged economic repercussions of the pandemic, such as inflation, labor shortages, and a decrease in consumer purchasing power, have likely dampened the demand for non-essential electronics. Still, I believe these multifaceted challenges proved HIMX's sensitivity to macroeconomic fluctuations.
Moreover, the evolving consumer behavior, shaped significantly by the pandemic, has also influenced the electronics market. 2020 and 2021 witnessed an uptick in demand for home electronics , spurred by the widespread adoption of remote work and home-based entertainment. However, 2022 signaled a potential shift. As people began returning to physical workplaces and outdoor recreational activities, the demand for certain electronics might have softened, affecting companies like Himax. Analyzing Himax's revenue distribution , it's evident that sales for large-sized display drivers decreased from 25.7% in 2021 to 22.0% in 2022, while those for small and medium-sized applications rose from 62.3% to 64.8% . The consistent performance of non-driver products, accounting for approximately 13% of total revenues, suggests a market trend favoring smaller applications. I believe the rising demand for portable devices and wearables will continue to drive this trend.
From a profitability perspective , HIMX's historical gross margins show a noticeable jump during the COVID-19 pandemic, peaking at 48.39% in 2021, possibly due to supply chain disruptions leading to higher product prices. However, by 2022, the margins had adjusted to 40.55%, suggesting a return to more normalized market conditions. Operating expenses as a percentage of revenue also saw fluctuations, with R&D expenses increasing from 9.79% in 2021 to 14.61% in 2022, indicating a renewed focus on innovation.
Seeking Alpha plus author's elaboration.
HIMX appears to be reverting to its historical EBIT margins , which hover around 4.5%. This figure is derived from averaging the company's EBIT margins since 2013, deliberately excluding the years 2021 and 2022, which I believe were skewed by the pandemic and the associated economic disruptions in China. While external factors will invariably cause fluctuations in HIMX's EBIT margins, using these historical averages provides a foundation for valuation. The company's average effective tax rate stands at 16.2%, and when examining D&A and CAPEX, the historical norms are 2.2% and -3.0% of total revenues, respectively. HIMX's net operating working capital has shown a consistent annual growth of 0.9% since 2016. Using these metrics, I've formulated an FCF run rate estimate, valuing it as perpetuity using the FCFF DCF method and applying the CAPM's recommended discount rate of 15.22%. This approach allows me to smooth away short-term macroeconomic shocks and focus on HIMX's intrinsic earnings power.
Seeking Alpha plus author's elaboration.
Unfortunately, my valuation model indicates that the stock might be significantly overvalued, suggesting a potential 59.3% downside, translating to a fair value of approximately $2.36 per share. While this projected decline might seem steep, it's worth noting that the stock had previously traded as low as $1.84 per share pre-pandemic, a period that artificially bolstered its performance. Moreover, as the Fed tightens liquidity in the markets, valuations could continue to contract, further supporting my bearish valuation.
TradingView.
Going forward, I anticipate HIMX's revenues and margins will continue to return to their historical means, implying a fair value considerably lower than its current market price. Given this potential downside, I'm inclined to rate the stock a "sell." However, I also acknowledge the company's competent management. And, with HIMX's susceptibility to macroeconomic cycles and unforeseen events, there's always the possibility of favorable secular trends re-emerging for HIMX. Therefore, while I remain bearish on the stock due to its perceived overvaluation, I would advise against shorting it outright.
Conclusion
HIMX has established a significant presence in the semiconductor industry, a testament to its strategic positioning and product offerings. Analyzing the company's financials reveals certain challenges, most notably the 22.3% decrease in 2022 revenues. This decline highlights the influence of macroeconomic variables and shifting market dynamics on the company's performance. In my view, the potential overvaluation of the stock, suggesting a 59.3% downside to a fair value of approximately $2.36 per share, is a crucial consideration for investors. While HIMAX's core products are undeniably essential in our digital era, its exploration of innovative technologies indicates a forward-looking approach to growth. However, the recent financial trajectory also emphasizes the tech sector's inherent unpredictability, often swayed by broader economic trends. Based on the current valuation, I'm inclined to adopt a bearish stance on the stock. Yet, I believe it's prudent to refrain from shorting it outright, given the ever-present possibility of macroeconomic conditions pivoting in HIMX's favor.
For further details see:
Himax's Return To The Mean Suggests It's Overvalued