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Before Buying OmniVision, Look Both Ways

NEW YORK ( TheStreet) -- Since reporting fiscal first-quarter earnings results that disappointed the Street, shares of OmniVision (OVTI - Get Report), which were already in a downtrend, have lost another 17%.

Understandably, OmniVision bulls insist that the stock is oversold, while "observers" are debating whether to take a closer "peek" at a possible turnaround candidate.

Although the valuation does look interesting here, I would be careful about catching -- what might prove to be -- a falling knife.

This is not the first time this company has taken some bruises. While OmniVision, which has a strong position in the image-sensor market, has benefited from its ties to Apple (AAPL), the company has also experienced some volatile price swings. After this recent selloff, it's anyone's guess where this stock is heading next, especially in light of what I believe was a decent quarter.

First things first: Given the weakness we have seen in mobile handset shipments, that OmniVision was able to grow revenue by close to 45% year over year was pretty impressive. Plus, the fact that revenue advanced 11% sequentially amid a low ASP, or average selling price, environment was equally remarkable. Unfortunately though, OmniVision still didn't do enough to please the Street -- which had modeled for an extra 2% to 5% growth (according to some estimates).

Now, for a little more context, consider that Qualcomm (QCOM), which is the leader among semiconductors in the mobile/wireless business, is coming off a quarter during which revenue advanced 35% year over year. In the same category, Broadcom (BRCM) just posted 7% revenue growth, which fell short of Street estimates by nearly 10%. Yet, neither Qualcomm nor Broadcom have seen their stocks erode to the degree of OmniVision. This is even though all three companies are dealing with the same fears of high-end mobile device saturation.

By that logic, investors are betting that OmniVision's 17% decline in the stock was an overreaction. It very well may be. But there's one key difference.

As has been the case for quite some time, OmniVision continues to suffer from weak leverage. Also, profitability hasn't always been strong, which explains the company's history of volatility.

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