Will Himax Technologies’ Big Catalyst Fizzle Out Yet Again?

Himax Technologies (NASDAQ: HIMX) investors could be getting a sense of deja vu as the company tries to catch another trend that’s hit a stumbling block. The image-sensor chip company has had a terrible start to the year (down about 25% year to date) as it’s been plagued by concerns that the adoption of 3D-sensing technology in smartphones to enable augmented reality applications will be slower than anticipated.

Himax has bet the house on 3D sensing, and it badly needs this technology — which is prominently used for facial recognition — to take off. But it looks like investors will have to keep playing the waiting game before this catalyst kicks in. Himax recently confirmed that smartphone makers are taking longer than anticipated to include 3D sensing technology. As a result, it now expects its 3D sensing chips to start shipping toward the end of the year.

So, just like Alphabet‘s now-discontinued Google Glass smart glasses and Microsoft‘s HoloLens mixed-reality headset, will 3D sensing turn out to be another missed opportunity for Himax?

Image source: Getty Images.

Why it’s different this time

The common theme between Google Glass and HoloLens was that they were experimental products using Himax’s chips. So when the two tech giants decided to shelve these projects, Himax turned out to be a big loser. It had built up a lot of hype and raised investors’ expectations about the potential windfall gains once those products hit the mass market.

But with 3D sensing, the scenario is different. Himax has already supplied its 3D sensing chips to major smartphone manufacturer Apple (NASDAQ: AAPL), which selected Himax last year to supply components for the TrueDepth front camera system, which it uses in the iPhone X to enable facial recognition.This gave the chipmaker a massive financial boost.

Now waiting for other smartphone manufacturers to follow Apple’s lead, Himax has prepared itself for such an eventuality by partnering with Qualcomm (NASDAQ: QCOM). The two companies completed the development of their SLiM 3D sensing solution in February this year, and it’s now ready to be deployed on smartphones powered by Qualcomm’s high-end Snapdragon chips. But more importantly, there’s a more affordable chip platform in the works that would allow Himax and Qualcomm to target mid-tier smartphones as well.

In all, Himax’s 3D sensing opportunity looks credible; the company has created and shipped a product that could become huge. In fact, market intelligence provider TrendForce estimates that the smartphone-led 3D sensing solution market could grow tenfold from 2017 to 2020, with its compound annual growth rate through 2020 a terrific 209%.

TrendForce suggests that such massive proliferation in 3D sensing demand will be driven by the adoption of this technology by other mass-market smartphone OEMs (original equipment manufacturers) such as Samsung and Huawei. So, it looks like it’s just a matter of time before this catalyst starts contributing big time to Himax’s top line, though investors need to be aware of a few caveats.

Smartphone fatigue could be a problem

Himax isn’t the first company to note problems stemming from weak smartphone demand. Chipmakers Synaptics and Applied Materials have already taken hits from the slow adoption of new technologies in high-end smartphones. Synaptics, for instance, saw demand for its in-display fingerprint sensing solution fizzle out because smartphone OEMs weren’t willing to pay the additional cost for an incremental feature.

IDC research manager Anthony Scarsella opines that “[t]he abundance of ultra-high-end flagships with big price tags released over the past 12-18 months has most likely halted the upgrade cycle in the near term.” It’s likely that consumers are now opting for devices that pack in solid features at a reasonable price, instead of shelling out for smartphones that deliver incremental upgrades.

This could throw a spanner in the works, as Himax is currently targeting just the premium smartphone market with its 3D sensing devices. Moreover, it remains to be seen if manufacturers will be willing to pay to include such features.

Himax now believes that 3D sensing demand will ramp up in 2019 instead of this year. But the 3D sensing windfall gains should eventually arrive for Himax as other smartphone OEMs have been quick to copy Apple’s features in their own devices. It’s also working on developing a budget solution so it can cater to a larger market beyond premium smartphones. In Qualcomm, it seems to have chosen the right partner to give wings to its 3D sensing ambitions in the Android smartphone space. Himax investors could be rewarded handsomely for their patience, provided the 3D sensing opportunity starts materializing sooner rather than later.

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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 GOOGL, GOOG, 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.

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