InvenSense (NYSE:INVN) designs, develops, markets, and sells micro-electro-mechanical system (MEMS) gyroscopes for motion tracking devices in various consumer electronics. I explored the possibility that InvenSense products would be included in the latest iPhone releases in a September 12th Seeking Alpha article "Will InvenSense Sensor Be In The iPhone 5s? D-Day Is Sept. 20."
My short-term thesis in my previous article revolved around the potential upside for InvenSense shares if its sensors were included in the high volume iPhone line.
Unfortunately, for InvenSense, iFixit confirmed in its September 20th iPhone 5s Teardowns that the company's products had not been included within the lucrative iPhone 5s supply chain. As expected, shares of InvenSense pulled back 5.85% (09/20/13 - 09/23/13) as short-term traders unloaded their positions.
Two investment strategies
In my previous article, I presented two investment strategies on how to play the company.
First, for long-term holders I suggested to buy a half position in InvenSense and then fill the other half of the position after the teardown reports are released. Investors who had taken this approach would be up with shares trading near its 52-week highs. The day I wrote my previous article, the stock closed at $18.75 and the day after the Teardown reports the stock closed at $16.57. If an investor had purchased half the position at the time of writing and the second half after the teardown, as suggested, the investors average cost would be $17.66 (using closing days prices for Sept 12 and Sept 23rd.) At the time of writing this latest article, InvenSense stock closed at $19.38, so the investor would be up 9.7% while the S&P 500 is off -1.98% during the same period.
The second strategy, the "lotto ticket" option strategy happened to be a more aggressive trade. As I had stated, I bought the $19 and $20 calls expiring September 20th. With nothing from iFixit's teardown, these options expired worthless. My loss was less than if I held the shares over the next few days, which is why I liked the option trade for such events as options offer a well-defined risk profile.
Who won the sensors?
Regarding who won the iPhone 5s sensors, we learned NXP Semiconductors (NASDAQ:NXPI) made the new motion processing M7 chip and that Bosch Sensortech won the 3-axis accelerometer, STMicroelectronics (NYSE:STM) got the 3-axis gyroscope and AKM made the 3-axis magnetometer for the iPhone 5s.
Samsung (OTC:SSNLF) smartwatch points to a bright future
With the iPhone 5s loss now behind InvenSense and short-term traders having taken their profits off the table, shares are breaking out again in a jittery debt ceiling market to highs investors haven't seen since March 2012. Turns outs the company is in the news a lot of late. AnandTech reported a teardown of the Samsung Gear Watch showed that InvenSense's products were included in the Gear smart watch. A MPU6500 sensor, which "integrates a 3-axis accelerometer, a 3-axis gyroscope, and an onboard Digital Motion Processor™ (DMP) in a small 3x3x0.9mm QFN package."
Unfortunately early reviews for the Gear Watch don't look promising, as noted by well-respected New York Times tech writer David Pogie:
Nobody will buy this watch, and nobody should. But there's something here under all the rubble. Sometimes the Gear can be liberating; sometimes it makes possible tasks that you can't do while you're holding a smartphone. We just need somebody to find the right balance of labor between the watch and its companion device - to figure out what a smartwatch should and shouldn't be.
The Samsung Gear probably isn't a device that will garner huge sales, add the fact it can currently only be paired with the recently released Galaxy Note 3, greatly reduces it potential customer base. The Galaxy Note 3 also includes InvenSense MPU6500 MotionTracking chip.
One aspect where Samsung did a fantastic job with the Gear watch was with its newly launched ad campaign for the new product. You can see the ad here on YouTube.
It is a fantastic ad, which is an ode to the great smartwatch we all remember from Dick Tracy (1946), Jetson (1962) and Star Trek (1979). I came away more convinced than ever after watching it, that the right devices will win tens of millions of customers. As IHS stated "It appears that Samsung Galaxy Gear smartwatch is a prototype masquerading as a commercial product - and because of that, it is unlikely to be successful in the market."
A smartwatch could also become a key factor in smartphone buying decisions, as early expectations is that a smartwatch will only work within its own ecosystem. For example a Sony (NYSE:SNE) Smartwatch 2 will only work with Ice Cream Sandwich loaded Android smartphones. Consumers will ultimately want matching devices which benefits the manufacturers as consumers will be more hesitant to switch devices after investing in both a smartphone and a smartwatch. Jeff Orr, a mobile industry analyst with ABI Research noted on the market size:
"Estimates that there will be 1.2 million smart watch shipments worldwide this year, 7 million in 2014 and 140 million in 2018. That growth, he says, is based on the assumption that three or more big players enter the space and drive consumers to adopt the device"
We have already seen more than three big players entering or planning on entering the smartwatch market such as Qualcomm (NASDAQ:QCOM) who announced its Toq Smartwatch. Sony's Smartwatch 2 is currently on the market, while Microsoft (NASDAQ:MSFT)/Nokia (NYSE:NOK) have hinted at a Lumia Smartwatch and a possible LG flexible LCD tech entry. Google (NASDAQ:GOOG) has been reportedly working on its own smartwatch under the Codename of Google GEM and recently purchased smartwatch wearable device maker WIMM Labs for an undisclosed amount according to Gigcom.
Will an Apple (NASDAQ:AAPL) iWatch set the tone for the market?
Now the smartwatch that everyone is truly waiting for… the iWatch from Apple is expected sometime in 2014. Piper Jaffray tech analyst Gene Munster thinks Apple will sell 5 to 10 million iWatch devices in its first year of release (I think the figure is low). The size of this market is still in question as Munster estimated Apple alone will sell more iWatch devices than the total market size that ABI estimated for 2014. Apple will likely hit a home run with its iWatch, but I don't believe it will contribute that much to the company's bottom line as Jefferies analyst Peter Misek sees March 2014 as a possible launch time with a $300 average selling price as the most realistic pricing.
InvenSense's future with Apple's iWatch line is a complete shot in the dark to me, and probably not priced in the stock and rightfully so. Many believe the M7 will be in the iWatch, a potential big win for NXP Semiconductor if true. This does not mean that a tear down of any potential iWatch won't be as interesting, as InvenSense could still win gyroscope or axis business (each unit axis cost estimated at $0.70). Yet this wouldn't be as lucrative on a per unit basis as the MPU6500 sensor win in the Gear Watch.
InvenSense can grow with or without Apple
No Apple product, no problem. If history is any sort of indication, not every person will be buying an iWatch in the same sense that not every person has bought an iPhone. Despite that Apple still commands a large market share in the high end smartphone market, but doesn't come anywhere close to dominating the entire market as there exists many other successful manufacturers. InvenSense can continue to win lucrative or larger deals with the other potential manufacturers Samsung, HTC, Google, Amazon, LG, Sony and Microsoft.
The company seems to be winning those manufacturers so far, as analysts at Craig Hallum stated on September 7th that they believe the company has likely won new design wins from the Google Nexus 5 and Amazon.com's (NASDAQ:AMZN) Kindle Fire HD both of which should be solid products and achieve success in the market. Any inclusion of InvenSense sensors in those product lines is a clear win for the company.
Evercore Partners Patrick Wang has also updated his views on a potential deal with Apple in Barron's "We believe that [sensor maker] InvenSense is now ramping at Apple." as he believes InvenSense products will be inside the new iPad, launching October 22nd.
The smartwatch market reminds me of the smartphone market of 5 years ago, I see tremendous unit growth potential and the possibility of separate devices that are "tailor made" for businessman, hipsters, Fashionista and fitness freaks, like the current traditional watch market. Again just watch Samsung Gear smartwatch ads ("Evolution" and "A long Time Coming") and tell me that you wouldn't be inclined to buy one if it did all the things we have always expected a smartwatch would do. It's the natural evolution in personal communication devices in my view.
On October 2nd, Maxim Group gave InvenSense a 12-month price target of $21, based on 23x normalized earnings power of $0.80 and $2.37/cash per share on the stock. I am a buyer of InvenSense stock, even at current price as a pure play on smart watches, wearable and overall sensor growth in the technology market. The company has many upcoming notable dates such as Apple's expected iPad and iPad mini October 22nd presentation. A product teardown is likely to occur around November. Also of note, the company announced it will report earnings and the all important conference call on October 21.
Author's side note: I am sure Twitter App (NYSE:TWTR) on a smartwatch will be crazy popular for twitter addicts.
Disclosure: I am long INVN, MSFT, SNE, AAPL. 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.