Why Himax Technologies Is Struggling

Himax Technologies (NASDAQ: HIMX) investors should be getting a sense of deja vu as the chipmaker's latest results confirm that a much-anticipated catalyst won't be kicking in this year. This won't be the first time that Himax has promised a lot to investors, but eventually failed to generate tangible gains from the opportunities it was originally counting upon.

The company was flying high late last year after it scored the win to supply its wafer-level optics (WLO) chips to Apple (NASDAQ: AAPL) to facilitate the facial recognition feature in the iPhone X. It touted how 3D sensing technology in smartphones is the future, and it wouldn't be long before other manufacturers started duplicating Apple and deploy the same in their devices.

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However, management's latest comments indicate that Himax has cooled on the 3D sensing opportunity, and wants investors to remain patient until next year for this opportunity to materialize. But Himax's history of missed opportunities such as with Google Glass and Microsoft HoloLens has investors worried, as evident from the beating that the stock has taken this year.

Making the wrong call

Himax's revenue shot up 20% annually during the second quarter as its smartphone customers bought more of its touch and display driver integration (TDDI) chips to replenish their inventory. Demand for these TDDI chips is on the rise, as they integrate the touchscreen controller and the display driver into a single platform. This allows smartphone OEMs (original equipment manufacturers) to reduce the size and lower the cost of the display components, and eventually make bezel-less smartphones.

With most of the smartphone OEMs coming out with end-to-end displays, this is a great business for Himax to be in. In fact, the company points out that TDDI chips are sold at double the price of the traditional display driver chips, so they carry stronger margins.

But sadly, Himax won't be able to make full use of this opportunity thanks to capacity constraints. The company estimates that TDDI chip shipments will drop 10% sequentially in the current quarter because it is still working to source new foundry capacity. The situation could have been better had Himax not bet the house on boosting the production of 3D sensing chips, which now looks like the wrong call.

Losing out

Himax estimates that its smartphone chip shipments will drop 40% sequentially in the current quarter, even though this is the time when Apple ramps up the production of new iPhones. The rumor mill suggests that Cupertino will equip its entire iPhone lineup with the facial recognition feature this year, so Himax should have witnessed a jump in shipments.

But it looks like the company's 3D sensing opportunity has been hijacked by the competition. Himax had won the 3D sensing slot at Apple last year after rival chipmaker Finisar failed to qualify its product in time for use in the iPhone X. That allowed Himax to split the 3D sensing business with Lumentum Holdings, but Apple had plans to diversify its supply chain.

Cupertino advanced $390 million to Finisar to build its production facility. So it might be possible that Himax has lost its spot in this year's iPhones, and management's comments that it expects sales of 3D sensing chips to gain traction from next year indicate the same. Himax expects Android smartphone OEMs to start adopting 3D sensing technology in the first half of 2019, though it was originally expecting the trend to catch fire this year.

Coupled with a probable loss of business from Apple and the delay in the Android smartphone opportunity, Himax expects its top line to remain flat sequentially in the current quarter.

Is it over?

But Himax still has promise. The company has positioned itself to tap the Android 3D sensing opportunity by partnering with Qualcomm, but investors need to keep in mind that smartphone makers have been reluctant to adopt new technology, to keep costs in check. As such, investors need to tread with caution and watch Himax from the sidelines as it is losing traction in the smartphone business, and it is unlikely that a turnaround will take shape this year thanks to the missed opportunity at Apple.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.