Himax Technologies, Inc.: Set For A Short-Run Slump (HIMX)

Investment Thesis

The semiconductor stock market has been poor in 2022. The decline in the industry stock prices has been dramatic. The SPDR S&P Semiconductor ETF (XSD) has fallen by 38.97% so far in 2022, with losses extending after reports of export restrictions on semiconductors and equipment by the US Department of Commerce to China. This explains the dismal performance exhibited by Himax Technologies, Inc., (NASDAQ:HIMX). The company’s share price has been on a downward trajectory, resulting in a ~43% loss over the last year.

The company’s financial status has been deteriorating Quarter over Quarter as a result of the challenges encountered by the industry. The United States Department of Commerce issued severe restrictions on exporting semiconductors and equipment to China on October 7, adding more challenges to the industry. Several semiconductor companies, whose future financial health investors already see as tenuous, might lose hundreds of millions to billions of dollars in revenue as a result of the restrictions. Supply chain problems, surging inflation, and rising borrowing rates have already impacted the business hard, and these export restrictions only make things worse.

Consumer demand for electronics like smartphones and PCs has fallen as a result of problems in the semiconductor industry. I believe this has had a major impact on HIXM’s declining financial health, as it has led to inventory problems. Since I believe that the industry’s gloomy prognosis will only serve to fuel the downward trend now being seen in the company, I am pessimistic about its near-term prospects and take a bearish stance.

A Bleak Short-Term Outlook?

Even though the US Department of Commerce’s restrictions have been the primary cause of the recent drop in semiconductor stock prices, these new worries just add to the longer-standing ones that have been plaguing the sector for months. Companies across all markets have decreased investing in innovative semiconductor products amid fears of a worldwide recession and weakening consumer spending habits.

During the pandemic in 2020 and 2021, there was a high demand for PCs, so manufacturers sent a lot of orders to foundries to make more chips. However, that demand has gone down in 2022. It’s not just a drop in PC sales that is dragging down the semiconductor market. Even though 2020 and 2021 were solid years for semiconductor companies because of the demand for PCs, most of the growth in the industry in the last ten years was driven by smartphones.

With the release of the iPhone 14, it is clear that this year’s array of smartphones has been aimed more at incremental improvements than the radical overhauls that were introduced in 2020 and 2021. Consequently, there was a decline in the need for cutting-edge semiconductor solutions in mobile devices. There is a cap on semiconductor growth in the smartphone market because of fears of decreased consumer spending in the case of a prospective recession.

According to Morningstar analyst Davuluri, the semiconductor sector would fare poorly overall in 2023, with particular markets continuing to be challenging due to supply shortages. These markets include semiconductors for industrial and vehicle usage. When it comes to how long that weakening might persist, though, far less is known.

HIMX’s Inventory Problems: Market Slowdown?

During the Q3, 2022 transcript call, the company’s Chief IR & PR officer admitted that they had inventory challenges which he believed affected their revenues significantly.

Eric Li,” The excess customer inventory, particularly in consumer electronics, adversely affected our sales, resulting in high inventory levels as our production always begins months in advance.”

As of the end of the third quarter of 2022, their stockpiles were worth $410.1 million, up from $337.3 million in the previous quarter and $160.9 million a year ago. Intense customer inventory control in response to weak end-market demand and a dim outlook has resulted in a rapid decline in demand, which is reflected in the current high stockpile levels.

Rubbing salt in the wound, the company’s quarterly inventory turnover ratio has dropped considerably, from 2.85 in July to 0.572 as of now, a drop of approximately 80%. It’s clear from this number that the company’s sales and stock replenishment capabilities have plummeted by 80 percent. In addition, the company’s quarterly Days Inventory Outstanding has increased dramatically from January’s 75 days to the current level of over 250 days (a 3.3x increase). This worrying pattern suggests that the corporation is having a harder time than ever before turning its inventory into sales, with the number of days it now takes to sell an item tripling from January’s levels to 250.

Low demand is a direct effect of this phenomenon, which in turn stems from problems inside the sector. Given the dismal forecast for the industry, I anticipate this trend will deteriorate in the near future, further hurting the company’s financial health.

Deteriorating Financials: An Inevitable Bearish Trend?

Most, if not all, of HIMX’s financial metrics, have plummeted this year. The poor inventory statistics and the unfavorable macroeconomic climate have hit the company very hard, leading to a worrying and what appears to be an irreversible trend in the near term.

To begin with, the company’s revenues are on a sharp downward trend since January, from a figure of about $500M in January to the current figure of $213.63. This decline represents about a 57% decline in revenues since January.

Additionally, the company’s profitability is plummeting, which is a major concern. Its gross profit margin, for example, has dropped dramatically, from above 55% in January to around 34.95%, a drop of around 19%. Its net income and EBIT Margin are likewise rapidly declining.

In terms of liquidity, as of the 30th of September 2022, they had $227.9 million in liquid assets, which includes cash and other financial assets, down from $250.8 million a year earlier and $461.6 million in the previous quarter. The company’s financials have already been trending south, and this decrease in liquidity only exacerbates the situation. The bad liquidity characteristics of the corporation are summed up by the negative levered free cash flow trailing at -77.26M.

Overall, the company’s financial situation is degrading at a rapid pace due to industry challenges, and this pattern indicates an inevitable negative performance in the near future, in my opinion. The market as a whole appears to be trending downhill, but the table below suggests that HIMX is falling at a quicker rate.

Conclusion

As a result of factors such as supply chain interruptions and rising prices, the semiconductor sector struggled in 2022. The recent US sanctions on China have only served to exacerbate these challenges, making the near-term prognosis for the industry even less optimistic.

As a result of these challenges, HIMX’s share price and financial performance have taken on a sharp downward trajectory that appears irreversible in the near future. I anticipate that the company’s present downward trend will continue in the near future as a result of the inventory problems brought on by poor demand. There are a lot of uncertainties about the long-term prospects of the industry, therefore I suggest holding on to this stock for the time being as we observe how the industry adapts to the current bad performance and finds ways to succeed in the future.