Tickers in this Article: OVTI, AAPL, MMI, SNE, TSM, LLTC, MU
I've been writing about the markets and individual stocks for a while now, and it always seems like there's something wrong with OmniVision (Nasdaq:OVTI). I remember widespread beliefs that the image sensors that OmniVision makes were destined to become commodities and the company would face ever-shrinking average selling prices (ASPs), margins and earnings.

Well, as it turns out, industry-leading innovation and the lateral spread of a product into new markets and applications is a pretty good remedy to commoditization. Not only has OmniVision become a leader in the chip sensor business, it has benefited from the introduction of new products like smartphones and tablets as well as deeper penetration into older markets like laptops and webcams. (For more, see Omnivision Hosts A Bear Roast.)

With still more markets yet to penetrate (automotive, security and healthcare), will OmniVision get a little love at last?

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Fiscal Fourth Quarter - Numbers Good, Guidance a Worry
OmniVision delivered yet another quarter where results came in ahead of expectations. Revenue jumped 64% from the year-ago level, though sales did slide about 3% from the prior quarter, as this has been a slow patch for smartphones, tablets and the like. While the company did see a double-digit sequential decline in unit shipments (down 13%), the company continues to shift to more lucrative products and ASPs climbed almost 12% from the third quarter.

OmniVision continues to see solid profit leverage. Gross margin improved on both an annual and sequential basis, rising nearly a full point on the latter comparison. Operating margin came in at 13.9% this quarter, though the year-ago comp is too small to be especially informative, that was a 1.4% drop from the third quarter. (For more, see Analyzing Operating Margins.)

How Long Before a Slowdown Becomes Problematic?
While OmniVision reported a good quarter, analysts and investors were rattled by the company's guidance - the low end of which was below the Street. For a market that was already nervous about the company, this is tantamount to dumping gasoline on a smoldering ember. Worse still, it is not immediately clear what the company could really do to boost sales in the short term. If customers like Apple (Nasdaq:AAPL), Samsung and Motorola (NYSE:MMI) aren't selling as many phones and tablets, there's not much OmniVision can do about it.

Worries Abound, but How Credible Are They?
Far and away the biggest worry around OmniVision is whether they will lose some or all of their position as the image sensor supplier to Apple for the next iPhone (the iPhone 5). Some believe that Sony (NYSE:SNE) will capture this business - that would be a major setback to OmniVision.

How likely is it? Apple doesn't necessarily like to tinker with what already works, but companies like Linear Technology (Nasdaq:LLTC) have dropped out of Apple designs along the way due to cost issues. That is not necessarily applicable to OmniVision, though, as this company would likely be much more flexible on pricing than Linear was (Linear didn't, and doesn't, need Apple to maintain its business).

The bigger issue may frankly be whether or not Apple is confident that OmniVision can supply its needs. There have been rumors that OmniVision may be capacity constrained in that regard. OmniVision deals with Taiwan Semiconductor (NYSE:TSM) for its production needs and while that gives the company access to leading-edge technology (leveraging TSM's CMOS process and 300mm wafers, for instance), it does take some control out of management's hands. I have no idea, for instance, how Taiwan Semiconductor allocates capacity to its customers and whether there is flexibility to significantly increase production on short notice. (For more, see 5 Hot Semiconductor Stocks.)

The Bottom Line
Even with these worries, OmniVision is in good shape. The company is a leader in its market and looks to still have a technology edge over rivals like Samsung, Aptina (formerly part of Micron (NYSE:MU)), and STMicrolectronics (NYSE:STM). It's true that Sony wants to grow this business, but wanting to be a top-tier player does not automatically guarantee customer acceptance. In addition, there are several markets that offer long-term upside, including automotive (rear-view cameras), medical and security.

OmniVision shares look like a bargain, provided the company can continue to produce even mid-single-digit free cash flow growth. With seemingly perpetual negativity around this stock, it is not a name for investors with weak nerves or those who are prone to obsessing over message board chatter. For confident investors willing to block out the noise and hold for the longer-term, these shares are definitely worth a look. Risk-tolerant investors may find that all this negativity means little more than an opportunity to buy some attractively-priced growth. (For more, see OmniVision Still In Sharp Focus.)

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