InvenSense (NYSE:INVN), a leading provider of motion tracking devices, gained 35% last year. Despite outperforming this past year, 33% of InvenSense's stock is sold short. While the long-term story remains intact, declining earnings, overvaluation, and a lack of confidence indicate near-term concerns.
Over the next five years, InvenSense is projected to grow about 20% and possesses an impressive product line to support such growth. InvenSense's business can be divided into two parts, motion and sound. Out of InvenSense's six product lines, five are part of InvenSense's motion division. Each of those five product lines consist of MEMS (microelectromechanical systems) devices. Yole Development, a market research firm, estimates that the MEMS sensor market will add 1.5 billion dollars by 2017. InvenSense's five motion sensor product lines serve the smartphone, health and fitness, smart TV, tablet, OIS (optical image stabilization), and gaming markets. The first and most important of InvenSense's product lines, the versatile 9-axis line, contains the motion tracking devices used in smartphones, tablets, remote controls, gaming controllers, and wearable sensors.
The 9-axis line consists of the MPU-9250 and the MPU-9150. The latest addition, the MPU-9250, possess the most advanced motion sensor technology. Along with motion tracking, the MPU-9250 contains temperature, humidity, ultraviolet light, proximity, pressure, and light sensors. InvenSense says the MPU-9250 can be used for "running, swimming, biking, playing tennis, walking up or down hill, determining calorie burn rate, sleep monitoring, posture detection, and applications that detect if the wearer is indoors, outdoors, or driving a car." Better yet, the MPU-9250 is 33% smaller, and uses less power than its nearest competitor. The MPU-9250 will be on sale starting in Q1 2014. The chart below shows the growth of the 9-axis market. (Please note that I created all of the charts/tables using outside information from Nasdaq, IHS iSupply, and E*Trade.)
The next InvenSense product line, the 2-axis line, consists of three motion tracking devices. The three motion tracking devices are the IXZ-2150, IXZ-2020, and IDG 2020. Each of the 2-axis devices can be used for OIS (optical image stabilization), EIS (electronic image stabilization), and DirectPoint smart TV remote controls. The uses of InvenSense's OIS technology are in smartphones, where the 2-axis devices "reject the distortive effects of hand jitter in low light conditions and video jitter in any lighting condition." EIS devices perform the same function as OIS devices, except EIS devices are used when recording video. The final motion sensor product line, the 1-axis line, contains six devices used in health, fitness, and toys.
InvenSense's audio line consists of 13 different devices. InvenSense's audio line can be found in smartphones, tablets, teleconference systems, bluetooth headsets, video cameras, notebooks, and security systems. Of the above uses, InvenSense's smartphone audio devices appear the most enticing. Two major aspects of the smartphone, voice recognition and noise cancellation, are served by InvenSense's audio devices.
Earnings Decline and Overvaluation
Despite a phenomenal long-term story, InvenSense will experience an EPS contraction of 15.3% from 2013 into 2014. Also, InvenSense trades at a forward P/E of 25.7. While not lofty, InvenSense does not deserve such a high P/E entering into an EPS contraction. In addition, InvenSense trades at a PEG of 2.34. Along with overvaluation relative to EPS and growth rate, InvenSense is expensive on a price-to-book basis. Currently, InvenSense trades at 5.3 times book value. If 2014 was projected to be a blowout year for InvenSense, paying a premium would be rational -- yet 2014 is projected to be a 15.3% contraction (earnings data is from E*Trade).
Lack of Confidence
Over the past year, insiders have been aggressively selling shares, as seen in the graph below. The lack of insider confidence does little to bolster any hope of an upside surprise in 2014.
Currently, the number of shares sold by InvenSense insiders is six times greater the number sold by other insiders in the consumer electronics space (insider transactions data from E*Trade). Also of concern is InvenSense's massive short float. At 32%, a short squeeze may provide substantial upside, but such a large short float reveals near-term concerns. I surmise short sellers are looking to benefit from InvenSense's overvaluation during an EPS decline. Evidence that shorts are growing entering into 2014 can be seen in the graph below.
Despite a great long-term story, I suggest investors avoid InvenSense until EPS, overvaluation, and confidence concerns subside. Once bearish pressure leaves InvenSense, I highly advise investors to buy either common stock or long-term call options.