Buy iPhone 4's Camera Maker?

Looking for a solid-looking speculative buy in this otherwise tenuous market? Need something for your portfolio that’s not a high-yielder or one of Cramer’s C.A.N.D.I.E.S.?

Then “smash open the hottest, sexiest new gadget around to see what’s inside,” he told viewers on Friday.

He was, of course, referring to the new Apple iPhone 4, released this week. So many good derivative plays have emerged from Steve Jobs’ success — Cirrus Logic and ARM Holdings to name a couple —that this may be one of the only strategies that is working right now.

A great new feature on the iPhone is that it hosts two cameras, an improved, higher-resolution one on the back like previous models and another on the front that allows users to video conference with other iPhone owners. The company behind this technology is OmniVision Technologies , which produces the chips for both cameras, and Cramer thinks we’ll see the double cams “cropping up in all kinds of other smartphones” as well. HTC already has one, and that company buys from OmniVision, too.

Here are the basics on OmniVision: The company’s technology enables superior image quality in all kinds of mobile phones, notebook and netbook computers, Web cams, security equipment, in addition to ordinary cameras and imaging systems. It’s the mobile phones, which accounted for 55% of sale last quarter, that Cramer thinks are most important, though. He’s still a firm believer in the mobile Internet tsunami, that smartphones have gone from luxury to necessity and demand will continue to explode as a result. According to Morgan Stanley, smartphone unit sales are growing at a 41% clip this year.

OmniVision’s CameraCube technology, which is the secondary, front-facing camera on the new iPhone, is growing in volume, and its backside illumination technology for a smartphone’s point-and-shoot is “on fire,” Cramer said. In fact, management on the conference call said, “The growth we anticipate in BSI shipments during the coming quarter is so profound that we have challenged our entire supply chain to respond, and they have.”

Beyond Apple, Cramer said the growth for OmniVision will come from other phone makers who want to differentiate their product with these high-quality cameras. Because let’s face it, they can’t all be iPhones. The company is already taking share in five and eight-megapixel devices, both mobile phone and regular camera, and management expects unit shipments to continue to rise in the next quarter.

One problem that has plagued OmniVision is pricing, as cheaper phone cameras displaced more expensive components for regular cameras. But last quarter the company its first quarter-over-quarter average selling price in two years. As a result, Omni’s getting more profitable.

Two other quick points of note: The company raised sales guidance for next quarter far above analysts expectations – 21% to 34% sequential growth versus 9% from the Street – and it’s sitting on $6.11 a share in cash, almost 30% of the current share price.

Now, you may ask, has OTVI, up 53% so far this year, run too much? No, Cramer said. Not when you consider that Cirrus was up 76% year-to-date when he recommended that stock on May 10, and it’s up another 40% since. And ARM had already gained 35% before Cramer blessed it on June 7, and it has climbed 11% since. Also keep in mind that OmniVision is trading at just 15.8 times 2011 earnings, and that’s without factoring in that enormous amount of cash on the balance sheet.

“These Apple derivative smartphone plays don’t seem to play by the same rules as other stocks in this market,” Cramer said. “They can run and run and keep running, which is why OmniVision is such a terrific spec stock.”

When this story published, Cramer's charitable trust owned Apple.

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