Better Buy: Himax Technologies vs. Qualcomm

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Himax Technologies (NASDAQ: HIMX) and Qualcomm (NASDAQ: QCOM) both make crucial components for mobile devices. Himax produces display driver ICs (integrated circuits) for smartphones and tablets, and Qualcomm is the world’s largest supplier of mobile processors and baseband modems.

But over the past 12 months, Himax’s stock was cut in half as Qualcomm’s stock rallied more than 50%. Let’s see why these two tech stocks diverged, and whether or not those trends will continue into 2020.

Image source: Getty Images.

What happened to Himax?

Himax generated 47% of its revenue from display driver ICs for medium to large screens (like PC monitors and TVs) last quarter. About 30% came from driver ICs for smaller screens (like smartphones and tablets).

Both units are struggling with sluggish sales of LCD screens, TVs, and mobile devices worldwide. Himax tried to diversify away from those markets into connected cars, but macro headwinds also slammed the auto industry.

Himax generated the remaining 23% of its revenue from its smaller non-driver unit, which produces liquid crystal on silicon (LCOS) and wafer-level optics (WLO) components. These chips are crucial for augmented reality (AR) and virtual reality (VR) headsets: LCOS chips block light with reflective crystals, while the WLO process shrinks optical chips for smaller camera modules. The company also supplies components for depth-sensing cameras in newer smartphones.

Himax’s non-driver business once looked promising as big tech companies like Alphabet‘s Google (which owns a stake in Himax) and Microsoft ramped up their AR/VR efforts. Unfortunately, many of those efforts — like Microsoft’s HoloLens — remain years away from commercial launch. As a result, Himax’s growth in non-driver revenue decelerated over the past year.

A woman tries on a VR headset.

Image source: Getty Images.

What happened to Qualcomm?

Qualcomm generated 75% of its revenue from its mobile chipmaking business — which produces system on chips (SoCs) and baseband modems — last quarter. The rest came from its licensing business, which collects royalties from every smartphone maker in the world.

Qualcomm’s chipmaking business is struggling with sluggish sales of smartphones. Global smartphone shipments could fall 2.2% this year and mark the industry’s third straight annual contraction, according to IDC, before possibly rebounding 1.6% next year with the arrival of new 5G devices.

Qualcomm generates most of its profits from its higher-margin licensing business, which faces unresolved litigation and probes regarding its business practices. Several smartphone makers, which are already operating in a low-margin market, have repeatedly claimed that Qualcomm’s licensing fees are too high.

Other critics, including the U.S. Federal Trade Commission, have accused Qualcomm of using exclusive deals and chip-and-license bundles to lock competitors out of the market. The chipmaker also remains locked in an unresolved royalty dispute with Huawei.

Which company is poised for stronger growth?

Neither Himax nor Qualcomm posted impressive growth over the past year.

Himax’s revenue fell 7% annually in the first nine months of 2019, and analysts expect a 9% decline for the full year. Himax expects the headwinds in the mobile and TV markets to persist, but it also expects sales of its new touch and display driver integration (TDDI) ICs to rise significantly in 2020.

TDDI ICs bundle touch screen and display drivers into a single module, which allows OEMs to produce thinner and lighter smartphones. But even with that boost, analysts expect Himax’s revenue to decline 1% next year as its bottom line stays in the red.

Qualcomm’s revenue fell 14% in fiscal 2019 as it struggled with slowing smartphone sales and regulatory pressure on its licensing unit. But several headwinds, most notably its lengthy battle with Apple (NASDAQ: AAPL), have dissipated — and analysts expect some good news, with 13% revenue growth and 18% earnings growth this year.

Those are decent growth rates for a stock that trades at 14 times forward earnings. Qualcomm also pays a forward yield of 2.9% on its dividend, while Himax doesn’t have a dividend.

The clear winner: Qualcomm

Himax has a few irons in the fire, but it’s unprofitable and its core business of display driver ICs won’t recover anytime soon. Qualcomm hasn’t cleared all its legal and regulatory hurdles yet, but its core businesses should generate stronger growth next year as OEMs launch new 5G devices. Qualcomm’s stock is also cheap and pays a decent dividend, so it should continue to outperform Himax next year.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Microsoft. The Motley Fool owns shares of Qualcomm and recommends the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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