Himax Technologies: No Buying Opportunity (NASDAQ:HIMX)

Himax Technologies (NASDAQ:HIMX) is a fabless semiconductor company that offers imaging processing technologies worldwide. It announced Q3 FY23, where the revenues grew, and the margins were healthy due to recovery in the automotive business. However, there are some headwinds that can hamper its growth in the coming quarters. In addition, HIMX can be risky due to weak outlook and high valuations. Hence, I assign a hold rating on HIMX.

Financial Analysis

HIMX announced Q3 FY23 results. The revenues for Q3 FY23 were $238.5 million, a rise of 11.6% and 1.6% compared to Q3 FY22 and Q2 FY23, respectively. The major reasons for the rise were revenue increase in the automotive sector and higher shipment of CMOS image sensors. The automotive sector sales were strong due to strength in the TDDI and DDIC products as customers resumed order replenishment. Its operating income margin for Q3 FY23 was 4.6%, which was 1.8% in Q3 FY22. The operating margin benefitted from a favorable product mix. Higher sales in the automotive product line, which has a higher margin, benefited the margins.

The profit for Q3 FY23 was $10.7 million compared to $8 million in Q3 FY22. The increased demand for its automotive business is positive because it is the largest revenue contributor and a high-margin business for the company. However, there are some headwinds that might hamper its sales in the coming quarters. Its large display driver and consumer electronics revenues might be under pressure in the next quarter, and the reason for that is increased local competition in China and muted festival season. So, the softness in these markets might hamper its revenue growth. The management is also expecting its revenues for Q4 FY23 to decline around 8% compared to Q3 FY23. So, the outlook for the fourth quarter isn’t positive, and the sluggish growth expectations can affect its share price. So, considering the headwinds and weak outlook for the next quarter, I believe they might fall way behind in terms of revenue compared to FY22.

Technical Analysis

HIMX is trading at $5.5. It is trading below its 200 ema, which shows it is in a downtrend. In addition, it has been forming a lower highs and lower lows structure, which shows selling pressure. In 2022, it was trading around $16, and it is now at $5.5. Even after falling so much, I see an additional downside in HIMX’s share price based on its price chart. The stock has recently formed three red candles, which shows weakness. The next support zone for the stock is at $4.8. So, looking at the bearish price action, it might reach $4.8 in the near term. If the stock sustains at the $4.8 level, then we might see a recovery in the stock price. But if it fails, then the stock price might continue to fall. So, considering the current situation, I think one should avoid trading this stock.

Should One Invest In HMIX?

When we look at HMIX’s valuation, it is trading at a P/E [FWD] ratio of 20.23x, which is above its five-year average ratio of 18.55x and its EV / EBITDA [FWD] ratio is around 20.07x compared to the sector median of 14.81x. So, the valuation of HMIX looks a bit high, and considering the future outlook, I don’t think it might be able to sustain high valuations.

In addition, the shareholding pattern of HMIX looks dicey. Institutions own just 14.84% of the shares in the company, which can be a matter of concern because usually, where institutional holding is less, the share price volatility in these types of companies is high, and it is evident in the case of HMIX. I personally believe institution holdings in a company should be around 60%.

So, considering its weak outlook, bearish technical chart, and high valuation. I think HMIX can be risky, so I assigned a hold rating on HMIX.

Risk

In 2021 and 2022, display drivers integrated into TFT-LCD panels accounted for 88.0% and 86.8% of their revenues, respectively. For the foreseeable future, they might mostly rely on sales to the TFT-LCD panel industry. The TFT-LCD panel market is highly competitive and susceptible to fluctuations in the overall economy. Except for newly released high-end and high-resolution products, the average selling prices of TFT-LCD panels typically decrease over time due to various factors, including a decline in demand for end products that incorporate TFT LCD panels, new capacity ramp-up or improvements in factory utilization, technological advancements, and cost reduction. Their bargaining strength may grow as a result of the merging of some of their largest clients, which would put more downward pressure on their prices.

Bottom Line

Revenue growth and recovery in the automotive business are positive for the company and can help it maintain high margins. However, along with the positives, there are some negatives too, which are most likely to hamper its revenue growth in the next quarter, and the management’s revenue guidance shows it. I think now is not the right time to invest in HIMX due to its weak outlook, high valuation, and bearish price chart. Hence, I assign a hold rating on HIMX.