Some descriptions in this post were paraphrased from the most recent Immersion Corporation 10-K.
On December 17th, Seeking Alpha's Market Currents posted a note that IBM's (IBM) R&D Laboratory expects haptic technology to play a big role in our digital devices within the next five years. Haptic technologies allow people to use their sense of touch more fully when operating a digital device. Video game players may be familiar with the technology when they feel a gun recoil, an engine rev, or the crack of a bat meeting a ball.
Small cap Immersion Corporation (IMMR) is big in the sector. Because of my preference for investing in mobile pure plays, Immersion's 1,200 patents, and their position as kingpin in force feedback, the remainder of this article will focus on the small company.
Whether you call it haptic, force feedback, touch feedback, or tactile feedback, the technology is here to stay. Gamepads, joysticks, mobile phones, rotary controls and touchscreens are all beginning to incorporate the science into their products. Haptic effects can be used in alerts, e-mail, games, messages, ringtones, touchscreen interactions, and other user interface features to add information or identification, signal status or message arrival.
Immersion is the company that licenses haptic technologies to manufacturers who use them in products sold under their own brand names. Two examples are Microsoft's (MSFT) Xbox and the SONY (SNE) Playstation. However, it's mobile communications where Immersion Corporation will potentially make the most money. Their licensees in this space currently include Nokia (NOK), Samsung, and LG Electronics. Immersion Corporation is an Android and Windows 8 play. Apple (AAPL) is not part of the equation, although they use haptics in iPhones.
Immersion was founded in 1993, and went public in 1999. Their gee-wiz technology has been around for awhile, but hasn't done much for shareholder value. In 2001, it crossed the tape as high as $60, but has since been cut down to size as investors ran for the exits. It currently sells near multi-year lows at $6.50. In fact, only a month ago it was on death's doorstep selling at $4.15, but was thrown a stock-saving lifeline when it won a patent litigation with Google. The stock rose 50% almost immediately.
It must be noted that the patent litigation with Google only covers Google's Motorola brand of smartphones, not the entire Android universe. Although a battle worth fighting for, the war isn't over where patent infringement is concerned. In fact, it's a big problem for Immersion. Many device manufacturers that include Immersion's technology in their products have cut some corners, and haven't ponied up the money that is owed the company.
I think this a huge sticking point for them, and why the stock has been left unresponsive and unconscious for the past few years although it's been invigorated recently. Vic Viegas is the CEO of Immersion and he addressed the issue during the Q3 conference call:
We believe there have been close to 400 million basic haptic phones that are unlicensed that have been shipped, and it's those phones that we expect to monetize and turn into revenue. But I would say that the more important aspect of our ITC (International Trade Commission) action and the enforcement of our basic haptics is to establish the value of this IP, and generate the ongoing revenue from continued sales of these basic haptics products.
That reference to the International Trade Commission is the border war with Google's Motorola brand which has been already been won by Immersion Corporation. However, I believe the important point in the quote is that there are 400 million haptic enabled phones which may or may not be beneficial to Immersion's top and bottom lines. Forty-four percent of Immersion's revenues stem from the mobile division, and until they can collect on a regular basis, they may continue to take a financial beating. Litigation is an expensive process.
Paul Norris is CFO and right-hand man to Mr. Viegas. He discusses some of the ramifications of the intensive legal proceedings:
It's always tricky to predict legal expense with a lot of precision given that much of the expense can be a function of the other parties who are participating in the litigation.
Although these legal actions can be a detriment to the company, they can also be a positive in that investors like small businesses with deep patent war chests. The recent victory over Google could keep propelling the stock higher. Larger organizations like patent rich companies too, when looking to buttress their own portfolios in the form of a buy-out.
Another thing I like about the company is that it is primarily owned by institutions, 78%, and gets little to no coverage by analysts. Once the sell side community comes back into the fold, the stock may spike higher as initial analyst coverage and upgrades ensue. They say you only get one chance to make a first impression, but the company may be ready for a second act.
Immersion's business is seasonal, with much of the sales being done in the 4th quarter when many smartphones and game consoles are sold. There's also not much of a short float on the equity, only 5.6%, so the street thinks it's fairly valued. Traders may find this a nice entry point. However, I'm more long term in my approach, and my belief is that the company is expensive when we break down the numbers.
Immersion Corporation is projected to break even with earnings the 4th quarter of 2012, but are slated to lose money for the year. According to Yahoo Finance, for the full year 2013, the company is only expected to make $.16/share. That's a P/E Ratio of 40 for the full year with revenues increasing by 24%. That's not an apples to apples comparison, but they are growing incrementally, just like the technology. If revenues were increasing at 50% annually, I'd say that would be a different story.
This could be a well-timed investment if you are looking for a short term trade. Immersion may have the right formula for success as they attempt to re-create the magic that pushed their stock price to $60. However, with the fiscal cliff looming, a Beta of 1.7, a lofty P/E Ratio, and no guarantee of further patent wins, I think this stock can drift back down to the $4 range sometime in the next two quarters.