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Tickers in this Article: OVTI, AAPL, SNE, ATML, CY, SLAB, STM
Whether it is rumors of competitors taking share, products not working as advertised, or financial shenanigans, it seems like there has always been a bear story out there on OmniVision Technologies (Nasdaq:OVTI). Although this company now produces more than five times as much revenue in a single quarter as it did in an entire year in the early 2000s, the stock has constantly chopped up and down - nimble longs and shorts have both made money, but long-term shareholders dating back to 2004 or 2006 are probably wondering whether this stock will ever break out above the $30 share range.

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With OmniVision's latest quarter, and the subsequent barbecuing of the shorts' ribs, maybe the company finally has the momentum on hand to break out.

A Surprisingly Strong Quarter
With a decent string of earnings beats in its recent past, it is not all that surprising that OmniVision reported a good fiscal third quarter. That said, a beat of this magnitude is always a bit startling. Analysts ratcheted up estimates after this company last reported earnings, but did not go quite far enough.

For the quarter, OVTI reported that sales jumped 69% to almost $266 million - handily dusting the Street-high estimate of $248 million. On a sequential basis, the company saw volumes shipped rise almost 5%, while the ASP jumped 6%. The company's mix was also favorable with respect to higher-end products representing a larger share of the pie, though this is not always as favorable as it might sound as lower-end products can actually be quite profitable.

That said, profitability was not a problem here. Gross margin rose more than a point and a half sequentially (and more than five points from last year), as gross profits doubled. The company also reported a sizable jump in operating profit, though it is unfortunate that OmniVision elects not to provide a quarterly cash flow statement with its release.

The Road Ahead ... Probably More Skepticism
Nonprofessional investors may not appreciate a somewhat controversial aspect of the sell-side research game, one that may play a big role in why OmniVision is always beset by rumors and worries. Namely, sell-side analysts really do not get paid for telling clients "no worries here, everything is fine."

In some respects, analysts sometimes function like private detectives - they're paid to find dirt and/or confirm a client's darker suspicions. Consequently, even the merest hint of a problem in OmniVision's relationship with Apple (Nasdaq:AAPL) is good fodder - if the analyst is right (or guesses right) and there is a problem, they become a rockstar. If the analyst is wrong, then he or she tries to blame it on the source and hopes that the client does not keep them in the penalty box for too long.

That is not to suggest that OmniVision does not have any challenges. Virtually all of OVTI's major competitors, names like Sony (NYSE:SNE), Toshiba, STMicroelectronics (NYSE:STM), and so on, are much larger players. Then again, OVTI has quality products and using Taiwan Semiconductor (NYSE:TSM) as a manufacturer helps close some of the gap.

The Bottom Line
In terms of smaller chip companies with high smartphone leverage, OmniVision does not seem expensive relative to Atmel (Nasdaq:ATML), Cypress (NYSE:CY) or Silicon Labs (Nasdaq:SLAB) (nor relative to a giant like Broadcom (Nasdaq:BRCM)). Moreover, OmniVision does have other opportunities outside of smartphones and mobile computing, including gaming applications and other motion-sensing/motion-responsive applications.

Last and not least, while technical analysis is not for everyone, those who place some stock in it may want to watch this name to see whether it can finally and meaningfully crack the $30 barrier. Combine a possible technical breakout with relative undervaluation and solid performance and guidance, and the next few months could be quite interesting for OmniVision shareholders. (For related reading, take a look at Blending Technical And Fundamental Analysis.)

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