Chipmaker InvenSense (NYSE:INVN) is a leading provider of motion tracking sensor system on chips (SoCs) and sound solutions for consumer electronic devices. The company has been in the news of late, with rumors suggesting that Apple (NASDAQ:AAPL) could be using InvenSense's sensors in the next iPhone. However, I think it would be a better idea to see if InvenSense is a solid buy without Apple, as basing investment decisions on rumors is not a good idea.
Solid without Apple
InvenSense has seen solid growth at its mobile customers, and is gaining traction in emerging markets, such as China. InvenSense witnessed tremendous growth in its smartphones and tablets segment last quarter, with 83% of the total revenue coming from this business. The company was successful in gaining market share in various flagship products, such as the Samsung Galaxy Note 3, Google's (GOOG, GOOGL) Nexus 5, and Amazon's (NASDAQ:AMZN) Kindle Fire that are being powered by InvenSense's 6-axis motion tracking devices. Now, InvenSense's 2-axis OIS (optical image stabilization) Gyro platform for OIS-enabled smartphones, such as LG's G2 and Nexus 5 has also gained steam.
Products gaining traction
Most of InvenSense's customers are adopting its OIS system to improve camera quality for their products. Therefore, InvenSense expects strong traction from its motion tracking products going forward.
InvenSense has also received good demand for its MPU-6500, a 6-axis motion tracking product that is being adopted by the most of its customers that use the Android ecosystem. Driven by this product, it is seeing strong volume growth from its smartphone and tablet customers.
In addition, InvenSense has acquired the MEMS microphone business of Analog Devices (NASDAQ:ADI), and this will help the company gain audio content in mobile and wearable devices. InvenSense considers audio as a strategically important sensor technology, thus, the acquisition of this business will strengthen its product portfolio and help it provide better quality service to customers across the world. Moreover, the acquisition will also create new opportunities for InvenSense in the automotive and industrial markets.
InvenSense has experience substantial improvements in the gaming segment as well, driven by its 6-axis motion tracking solutions and 2-axis optical image stabilization products. Volume in this segment is increasing due to demand in markets such as China. Most of its customers have been using DMP 2 motion applications configured by OEM software that provide them complete solutions for motion tracking with low power consumption.
Targeting more markets
InvenSense has also landed multiple customer design wins for its motion tracking system on chips in the gaming segment that will provide customers with rich plug-and-play motion tracking solutions by exploiting its digital motion processing algorithms. With this system, InvenSense expects its sales to gain momentum going forward.
The development of 6-axis and 9-axis solutions has helped InvenSense advance its footprint in the health and fitness sector. These solutions provide higher accuracy in activity monitoring and tracking in wearable devices. InvenSense has launched additional sensors, such as gyroscope and magnetometers to enhance activity tracking. InvenSense expects that the wearable device category that includes health and fitness applications, smartwatches, and immersive gaming will gain steam going forward, and increase its addressable market in the process.
InvenSense is also deploying turnkey wearable platforms for health and fitness that will substantially reduce the time-to-market for equipment and device manufacturers. This invention will accelerate growth in InvenSense's health and fitness segment, where it is continuously working toward building a strong ecosystem with developers, healthcare providers, sports retailers, and big data services.
What about Apple?
A design win at Apple will certainly enhance InvenSense's prospects. Rumors have been floating around that InvenSense could "offer drop-in replacements for the current gyroscope and accelerometer sensors in the iPhone." As written on The Motley Fool (via MacRumors) -
"There's one additional socket that InvenSense could win on the iPhone -- an OIS gyroscope. The burgeoning technology is used to improve smartphone cameras by stabilizing the image using a gyroscope. Samsung neglected to use the technology in the Galaxy S5, but Apple may decide to integrate it into the iPhone 6. If it does, InvenSense is a clear choice."
So, there's no doubt that InvenSense could receive a big boost from Apple. But, as we saw, the company has a plethora of customers under its belt, and even if Apple is not there, it should continue doing well.
Fundamental view and conclusion
InvenSense looks expensive at its current levels, as the stock trades at a trailing P/E of 76. But, given the company's growth prospects, the valuation comes down to a more reasonable forward P/E of 26. Moreover, on a forward P/E basis, InvenSense is cheaper than the industry's average P/E of 33.60. The company's earnings are expected to grow at a solid pace going forward, so investors shouldn't mind paying a premium for InvenSense shares right now.
Analysts expect InvenSense's earnings to grow at a solid CAGR of 21.67% over the next five years, and only three of the twelve analysts that cover the stock have upgraded their earnings target in the last thirty days, according to Yahoo! Finance. This suggests that InvenSense's growth is not based on just Apple rumors, but a solid and diversified clientele.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.