When we broke the news that Himax (HIMX) was supplying the microdisplays for Google (GOOG) Glass, we expected some level of market reaction. Little did we know that the stock would nearly triple from $3 to $8 in the two months that followed.
Nearly a billion dollars of market value was added and the stock’s daily volume is now a multiple of what it was prior. Whether or not Google Glass ends up taking off, early investors have benefited greatly from the speculation. Further, the hype around Glass has spurred many other vendors to accelerate their competitive plans. In other words, we expect HIMX to attract several new customers in the year ahead.
This is why shares of Himax have taken flight. By developing a critical component for smart glasses (the microdisplay), Himax is positioned to profit handsomely as a multitude of vendors race to win market share in that market. Basically, HIMX is an arms merchant in a very big war.
Pixelworks (PXLW) is in position to follow suit. In fact, the results of our extensive research suggests that PXLW could drive the visual experience for Apple’s upcoming iTV (an Internet-based television – widely expected to be AAPL’s next major product).
The reason is simple. Unlike many of its smart phone competitors, Apple possesses very little TV manufacturing expertise. As a result, the company needs technology partners to succeed in the marketplace. Through its relationship with LG (a close partner of Apple) Pixelworks is in position to power the image processing for Apple’s iTV.
The company doesn’t have much competition (anymore). The Great Recession wiped out most of PXLW’s peers. Those who remained scaled back their R&D spending, leaving PXLW as one of a small number of independent vendors with bleeding edge technology. Because of this, PXLW could find its way into several new smart TVs. Indeed, we expect Apple’s entry into the market to be devastating to any vendor who falls outside of the top 5. Including the current #5 vendor, these companies represent 40% of the market.
In order to survive against giants like Samsung and Apple, they will need to cut costs without sacrificing competitiveness. As a result, we believe many will outsource their image processing to PXLW. PXLW’s CFO validated our hypothesis during an interview in which he intimated that the company’s licensing pipeline is as large as the company has seen in some time.
The Bottom Line
The TV market has been a technology graveyard for several years. This sets the stage for powerful refresh cycle…and the last time this happened PXLW nearly doubled its revenues and its stock rose 5x (from a low of $12 to a high of $60).
Over the next few years, we estimate that PXLW can generate 50-cents of EPS for each incremental $20 million in revenue. That’s a powerful statement when one considers that PXLW commands $12-18 per chip from a market that requires 1-2 chips per TV, is currently producing 66 million units, and is expected to more than double over the next two years. If you run the math, you’ll realize that PXLW’s opportunity is in the multi-billions. Basically, every 1% gain in market share could drive $20 million in revenue and the aforementioned 50-cents in EPS.
Not surprisingly, insiders have been doing nothing but buying. If the company adds just $20 million in revenue per year for the next few years, its annual EPS should skyrocket, from 20-cents next year to $1.20 two years from now. We believe this would justify a valuation of $12-18.
This wouldn’t be unprecedented – PXLW stock was $50 in 2004 and at one time changed hands for $140.
Excitement should be on the rise over the next few weeks. Next week, PXLW’s technology will be showcased at COMPUTEX (the largest technology trade show in Asia). The following week, PXLW will appear at another industry conference in Orlando. Simultaneously, Apple’s Worldwide Developer Conference will be underway, providing possible clues regarding Apple’s TV aspirations.
Like HIMX before it, PXLW is a relatively undiscovered company…and like HIMX before it, we are categorizing Pixelworks as a “Great Find” and believe its shares could be poised to triple.
By: Mark Gomes, CEO