- Haptics, or tactile digital effects, is a blossoming field that is coming to profitable fruition now.
- This company is simultaneously branching into wearables, mobile gaming and the future of automobiles.
- Its estimated EPS growth rate for 2014 is 214 percent.
Riding the latest wave of innovation is a reliable path to growth (and the lifeblood!) for most tech companies.
Once in a while, though, you come across a tech stock that is actually riding more than one wave of innovation simultaneously. When that happens, the ultimate profit opportunity for investors can be remarkable.
We found one of those stocks in the blossoming field of haptics, or tactile effects.
With haptics, a digital experience can be transported to something more akin to the real world. Imagine touching a tablet or smart phone screen, and literally feeling the illusion of motion or water or wind in your fingertips.
Haptics is much more than a special effect or a gimmick, however.
Using tiny motors or other devices, the technology excites the senses in games, video and music; it can simulate mechanical feel and sensory confirmation in mobile devices; it can improve safety in driving or performing medical procedures; and it expands functionality beyond audio or visual feedback.
The company involved in all of these promising haptics breakthroughs is Immersion Corp. (NASDAQ:IMMR), a company that is riding the crest of multiple innovative paths to profits.
Immersion has more than 1,650 patents and pending patents, and is far and away the haptics market leader. It makes its money from licensing and royalties. Companies such as Samsung, Microsoft and Sony have done business with Immersion.
Immersion is moving quickly into the field of wearable devices, having concluded the private nature of tactile feedback creates a more discreet user environment for wearable devices.
In wearables, OEMs can lever Immersion's tactile feedback to alert and notify users about location, appointments and unread messages, for instance, and all without socially disruptive audio alerts or visual distractions.
One of Immersion's newest projects is an agreement with an unnamed advertising technology platform partner who is integrating Immersion tools into digital ads. With haptics, an ad when touched may give the illusion of movement or of rough edges or even of a wet surface.
User research shows incorporating haptics into mobile ads may result in increased brand perception, intent to purchase and user engagement. - all valuable measures of success that advertisers will pay up for. Immersion is developing tools for advertisers, publishers and agencies to incorporate tactile effects in mobile content.
Immersion is already well-established in gaming, and the segue into mobile gaming has been a swift one. As the company vividly stated before the 2014 Mobile World Congress in Barcelona: "The unprecedented sense of realism offered by haptics… allows viewers to feel the pavement underneath a skateboarder, the rev of the engine in motocross or the impact of a crash from a BMX rider." Immersion effects have been used to enhance thousands of Android games have been downloaded over 80 million times.
Immersion's success with both mobile and gaming naturally led it to the world's largest market for both - China.
Last month, the company launched a subsidiary in China to expand its sales and customer support, broaden contact with the mobile ecosystem, and establish a new touch technology center there.
The rapid evolution of automotive technology, en route to driverless cars and other advances, has also not escaped Immersion's innovative bent.
In June, Immersion signed a multi-year licensing deal with Continental, a true multinational automotive supplier with operations in 49 countries.
The foray means Immersion tools will be integrated into touchscreen, touch pad and touch panel interfaces of vehicles, making it safer for drivers to interact with their cars without visual or audio distractions. The automotive segment for Immersion is still small, but already BMW, Lexus and Rolls Royce have adopted the company's technology.
The payoff for some of these innovations is likely beyond 2014, so it's a good thing Immersion is already profitable and growing quickly from its existing businesses.
In Q1 2014, Immersion's revenue mix was estimated at 50 percent mobile devices, 33 percent gaming, 13 percent medical and 4 percent automotive.
Immersion has a smallish market cap of only $325 million and revenues of only about $50 million. But its trailing annual revenue growth rate is 35 percent, and its estimated EPS growth rate for 2014 vs. 2013 is 214 percent.
The 2014 analyst EPS consensus compiled by First Call is $0.41, and Immersion's P/E Ratio (TTM) of 8.3 stacks up well against an 17.5 industry average, as does its ROE of 59.1 percent vs. the industry average 24.0 percent. The company has no long-term debt.
Immersion's operating margin of 9.9 percent is a bit light vs. the industry average of 22.5 percent. But the company has no long-term debt, and its hoard of cash and short-term investments was $81 million at the end of Q1.
There are some risks to consider: Immersion obtains a significant share of revenue from a relatively small number of clients. Samsung (OTC:SSNLF) alone represents 32 percent of revenues, and other significant clients may include Sony (NYSE:SNE), Xiaomi and Lenovo (OTCPK:LNVGF). Immersion has a stellar record defending its patents, but an important smart smartphone patent infringement case against HTC Corp. (OTC:HTCCY) is set for trial in March 2015. It's possible some of the OEMs Immersion depends on for licensing and royalty revenue could make their own haptics pushes. Average 90-day volume is only 214,000 shares.
Conclusion: Is Immersion's stock moving in the right direction? Definitely. Shares bottomed below $10 per share in April, recently cleared initial overheard resistance below $11.50, then pushed through the next big resistance point in the neighborhood of $12.50. IMMR's Q2 tentative earnings release date of July 31 looms large. The stock does not appear overvalued and has room to go higher. The shares were above $15 for an extended period in 2013.