InvenSense (INVN) is a semiconductor company involved in the manufacturing and selling of motion tracking devices and their individual components. The company was established in 2003 and is headquartered in San Jose, California. It is a leading provider of motion tracking devices for consumer electronics such as smartphones, tablets and wearable sensors etc.
InvenSense's motion sensors are also used in industrial applications such as platform and antenna stabilization, precision robotics, survey instruments, industrial power tools, UAV, and automotive applications. The company also offers turnkey motion interface solutions. Nasiri-Fabrication process is the core differentiating proprietary technology used by the company. Microphone solutions for smartphones and tablets are also provided by InvenSense.
The motion related solutions include products ranging from 9-axis to a single axis product. The 9-axis product is a fully integrated motion tracking device featuring a gyroscope, accelerometer and a compass. The 6-axis product is a motion processor including a gyro and an accelerometer. Along with these products the company also manufactures 3-axis, 2-axis and analog (single axis) gyroscopes. Sound related products include analog and digital microphones. InvenSense combines the capability to sense audio along with cutting-edge motion detection, which is important for many contextual awareness applications.
InvenSense generates around 90% of its revenue from Asia; 42% of its employees are based in Asia and substantially all the products are manufactured and tested there. The US contributes around 8% to the revenues of the company. Revenues are classified into three categories for reporting purposes. The company generated around 71% of its revenue from the smartphone and tablet category. Gaming and other revenues contributed around 19% and 11% respectively. InvenSense has three significant customers that were responsible for 24%, 18% and 11% of the company's net revenue for the fiscal year 2013.
Shares of the company are listed on the NYSE and are currently trading around $18, an increase of 140% since its IPO back in 2011. The company's valuations have increased by 71% in the last year or so. The stock appreciated after hitting a low of around $9 in May 2013.
Revenue in millions
The increase in the valuations is because investors are hopeful for next year's earnings. This year the earnings estimates are relatively low but still the stock is moving upwards, indicating that the market has its eyes on next year, i.e. 2015 fiscal year. The issue of senior notes may also have contributed to the slight increase in valuations since November 2013. The market has reacted positively to the company using more leverage. The large value of the issue is a positive sign because it also indicates that the company expects to grow.
Future Prospects And Catalysts
There are certain catalysts that will play a role in the future of the company. These catalysts are discussed in detail below.
The Inherent Growth Factor
InvenSense's operations are focused on motion tracking, using the MEMS technology. This inherently opens a door for the company to grow because of the growth prospects of smartphone and tablets. Most of the tracking devices of the company are used in phones and tablets. The company is positioned to capitalize on the growth of the mobile industry. According to IHS, the demand for motion sensors across industries will increase at a CAGR of 10.13% and the growth of microphones to be used in smartphones will grow at a CAGR of 24% (2012-2016). Moreover, the sales of internet devices will double by 2017, reaching a figure of 2.7 billion units. This indicates growth opportunities to be captured in the future. Furthermore, the global MEMS market is projected to double from over $10 billion in 2012 to more than $20 billion in 2017. The accelerometer penetration will increase to 64% from 37% and gyroscope penetration levels will increase to 17% from 4% currently. With InvenSense products, according to Investor's Business Daily, featuring in 70% of Google's (GOOG) Android phones and 90% of tablets, the company is set to gain from the growth of Android also.
All the above mentioned facts and future estimates point to the fact that the growth of mobile industry will enhance the business of InvenSense because its primary operations are positively correlated to the mobile industry.
Acquisition Of ADI's Microphone Business
InvenSense recently acquired the microphone unit of ADI (Analog Devices Incorporated). This acquisition makes sense as it complements the motion sensor segment of the business. Voice recognition and motion sensors are used collectively in many applications today. Via this acquisition, InvenSense has opened a way to offer microphone and motion sensor solutions in one package which could be cost effective both for InvenSense and their consumer. Moreover, as the company will simultaneously work on motion and sound, they are well-positioned to study the relation between the two and its implications for the consumer; and develop applications which utilize both voice recognition and motion sensing. Every third microphone installed in the iPhone 5S is an ADI one. So, it is likely that the microphone business will generate revenues through iPhone as well.
As mentioned earlier, a large proportion of the company's revenue is derived from a few customers. This fact can have serious implications if these customers switch suppliers. However, the company is a leading provider of MEMS products along with differentiating technology. The Nasiri-fabrication technology enables the direct integration of MEMS (Micro electro mechanical systems) with CMOS (Complementary metal oxide semiconductor) resulting in performance, reliability and cost benefits. This enabled InvenSense to pioneer the industry's first high-volume, commercial MEMS fabless business model. There isn't much risk of customer switching unless a competitor comes up with a better and more cost effective solution. Nonetheless, InvenSense has some reputed organizations in its customer base including Samsung, LG and Sony. The continuing market capturing performance by Samsung in the mobile devices business is a direct boost to the revenues of InvenSense. The Galaxy S4 and now the Note 3, both feature motion sensors from InvenSense. Higher sales of these phones will directly impact the revenues of InvenSense in the coming year. Another point worth mentioning is that there were reports about malfunctioning motion sensors of the iPhones 5S. This development gives InvenSense the opportunity to promote its own sensors to Apple (AAPL). Apple does not frequently change suppliers but the recent hardware problem could force it to do so and any related news can be a major boost to InvenSense valuations.
The Company posted revenues of $71 million in the most recent quarter, which translates to a growth factor of 29% on a year-on-year basis and around 26% growth as compared to the adjacent quarter. This growth is supported by the booming mobile industry and demand for motion sensors from other industries like smart television.
Net income also grew in the recent quarter and amounted to $13.6 million, as compared to $10.3 million in the previous quarter. The growth was around 32%.
Liquidity And Cash Position
Cash balances of the company stand at around $161 million in the most recent quarter. The operating cash flow was around $46 million in the trailing twelve months, with $10.1 million operating cash being generated in the most recent quarter. The cash generating ability of the company points towards a positive financial health. InvenSense had no gearing but recently introduced notes at 1.75% p.a. This capital structure now incorporates 34% debt. The debt will decrease the weighted average cost of capital of the company, thereby increasing the NPV and increasing the valuations. The current ratio of the company is well above the industry average; 9.3 as opposed to 4.3 for the industry. The company does not have any short-term liquidity problems. It has optimized its future value by adjusting its capital structure.
Price targets using 30x multiplier
PT in USD
InvenSense belongs to an industry of rapid growth which entails strong competition. The forward P/E stands at 25x, but the estimated growth factor for the next year is around 40%. The Industry is expected to grow at a rate of 35%; despite this high growth, a multiplier of 30x is used to reflect the continuously evolving nature of the industry. The price target is $21.3, indicating that the valuations will grow in the future and buying stock now would be a good call.
The motion sensor segment of the semiconductor industry is set to grow in the future, spurred by the boom of smartphones and tablets. The recent increase in sensor demand for smart televisions will also contribute towards the growth. InvenSense, the leading provider of sensor products for Android, is set to capitalize on these growth prospects because of its current customer affiliations and differentiated technology. The iPhone contract win, if possible, will further boost revenues, along with the microphone segment, which is already featured in iPhone 5S, will also increase revenues for the company. The value of the company is also enhanced by the changes in its capital structure. Future prospects and historical performance point towards the fact that InvenSense has the ability to be the global leader in motion sensor products. Therefore, with a strong presence in the Android market, decent customer portfolio and a potential contract with Apple, InvenSense is set to breakout in 2014. The valuations analysis above also reaffirms our buy thesis.
Therefore, we believe that InvenSense is one of the best technology bet at the moment due to its competitive advantage, diversified customer base and its high penetration of android devices.
Additional disclosure: Equity Flux is a team of analysts. This article was written by our Technology analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.