InvenSense: Growth At The Right Price

| About: InvenSense (INVN)


What constitutes a good growth investment opportunity? I'm talking about the kind of stock that nets you many times your original investment over the course of several years. Is it simply identifying a company that is growing their business? AMC Networks (NASDAQ:AMCX) has hit it big with a few hit shows since its spin-off from Cablevision (NYSE:CVC), yet I'm very wary of AMCX due to management issues and industry trends.

To find a great growth stock, we must not only look for early success, but for fundamental societal or technological changes that allow management to sustain and compound that success. Social networking, for instance, has changed how people communicate and LinkedIn (NYSE:LNKD) has been a big winner because of it. Still, I have argued (in comments here) that LNKD has already priced in the most optimistic of growth projections, and that an already saturated U.S. market puts the multi-year expected growth (and thus investors) at risk.

I believe that even growth investments still need to have at least an eye on valuation. Without proper valuation, if the growth thesis behind a stock even comes into doubt, you wind up losing your shirt, as Netflix (NASDAQ:NFLX) investors did last summer. Even if everything goes as projected, overpaying for growth can mean pre-paying for an eventual value trap, unless you time your exit correctly.

Our contestant: InvenSense (NYSE:INVN)

With those considerations in mind, I'd like to examine InvenSense as a potential reasonably-priced growth candidate. InvenSense makes integrated circuits, which help their host device detect motion and orientation. The company got its start with the Nintendo (OTCPK:NTDOF) Wii, which revolutionized game interfaces, but has since transitioned into smartphones and tablets. The latter categories of devices now account for over twice as much revenue as gaming according to the most recent earnings report. The portable, handheld nature of these devices demanded a new interface and InvenSense has been a key enabler of that.

As the chart below shows, early optimism was high and INVN doubled from its Nov. 2011 IPO in a matter of a few months. It topped around this time last year with a P/E ratio over 65. Despite the company's wonderful prospects, investors who ignored valuation to buy and hold then are currently sitting on a ~50% loss of capital.

INVN Chart
(Click to enlarge)

Historically, the company's products have mostly been used in Android devices and the supply chain problems that hurt Qualcomm (NASDAQ:QCOM) last year took their toll on InvenSense also. Not only have those problems eased, but InvenSense has since announced high-volume shipment for Windows 8 & RT devices. Apple (NASDAQ:AAPL) has been rumored to be next, and I think the branch out to Global Foundries, in addition to TSMC (NYSE:TSM), for production lends a little credibility to this, but probably not until Apple produces a device that really needs a smaller form factor, where InvenSense has an advantage. Earnings are recovering and the company beat in the last quarter. If the company merely meets projections for the upcoming earnings report at the end of April, it will sport a much more reasonable P/E of 18, at current prices. With short interest over 15%, and rising, this entry point may not last. All this is just near-term catalyst, though; back to the long-term growth story.

You don't have to read a report to know that mobile computing is revolutionizing people's lives. Most of us can remember a time when we (or our parents) had to write out detailed directions to a new destination. Mobile computing is changing our lives because the devices are not only portable, but location-aware. Information from motion and altitude sensors can be used to augment GPS readings to help with indoor and underground navigation, but that's only the beginning...

Perhaps, you're looking forward to an iWatch? Maybe you already have a MotoActv? I think mobile computing will gradually transform into wearable computing, and InvenSense is already making inroads. The application there is personnel tracking, but wearable computing will merge with many other trends. One more example that has shown great results but is still in its infancy: quantified self tracking. Analyzing life at this level of detail will require ubiquitous sensors, but doing so can eventually help with everything from your sleep habits, to diagnosing ailments, to improving your jump shot or golf swing. Those sensors will need to be as tiny and low-powered as possible and developers working in such nascent fields will want a clean one-stop solution rather than dealing with multiple gyroscopes, accelerometers, etc. These facets are where InvenSense really differentiates itself from other motion-sensor competitors such as ST Micro (NYSE:STM), making INVN uniquely positioned to profit from such trends for many years to come.

Risk factors

It wouldn't do to spin some pie-in-the-sky growth story without also looking at the risk factors. We've already covered valuation, and I'll simply add that INVN has virtually no debt, which further serves to minimize risk. Nonetheless, management can still make missteps and it should be mentioned that the founder and CEO stepped down at the end of last year. This seems to have been a planned, amicable change, simply brought on by success, as he stayed on the board through the end of the year. It may even be a positive, as many CEOs have difficulty transitioning from startup mode to running a successful complex company with many opportunities and resources to manage. Nonetheless, management changes and decisions should always be monitored.

A bigger risk is litigation from competitors. This seems to come almost automatically with successful innovation these days, and the main culprit here is ST Micro. The battle has been ongoing for about a year now, and while InvenSense has had initial success in the courts, it's definitely an ongoing concern that should not be forgotten.

Of course, any company must continue to execute in order to achieve long-term success. There has been a recent claim here the newest flagship Android phone from Samsung (OTC:SSNLF), the Galaxy S IV, does not use InvenSense technology, as its predecessor did. This ultimately comes from photos of what seems to be a tear-down of a version of the phone being distributed to China Unicom, despite the fact that the phone has not been formally released yet. Those photos show an Atmel (NASDAQ:ATML) UC128L5-U chip. The MarketWatch article already comments that components may vary in other versions of the phone, but even so, this does NOT confirm lack of InvenSense technology in the newest Galaxy. I was unable to find that specific chipset in Atmel's catalogs, however, several of Atmel's products combine InvenSense integrated circuits with Atmel's touchscreen controllers in a single chip. I don't see in/exclusion in any specific product as much of a factor for the long haul, but it goes without saying that InvenSense will need to continue to innovate and execute. For the growth thesis presented here, use of the company's technology in smaller, low-power form factors, will be of more interest than larger ones, such has home gaming consoles.


InvenSense has both short-term catalysts from an expanding customer base and significant short-interest, and long-term growth opportunity as a company enabling emerging societal change. News items over the past few months have conspired to create a 30% pullback to under $11 per share, which represents a very reasonable valuation, and thus an attractive entry point for long-term investors. While no stock is without risk, INVN should be considered as a potential buy and hold growth stock that could one day pay your children's tuition or make your retirement.

Disclosure: I am long INVN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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