Chip maker InvenSense (NYSE:INVN) is on a roll in 2014, gaining around 28% as the possibility of landing a spot in the upcoming Apple (NASDAQ:AAPL) iPhone is gaining more ground by the day. However, InvenSense had faltered when it reported its fourth-quarter results back in May. InvenSense had missed earnings estimates in the fourth quarter, and also issued a weak guidance. But the stock has bounced back remarkably since then, and looks set to get even better going forward.
With InvenSense's earnings coming up on July 29, it is a good time to take a look at its prospects and see why it can be a solid buy for the long run.
InvenSense had seen weakness in the gaming sector, and an increasingly competitive pricing environment also hurt its performance in the fourth quarter. But, management claims that the company gained share in its served markets, besides seeing a solid increase in attach rates of gyroscopes in an extensive variety of applications.
InvenSense also leveraged its expertise in budding and rapidly growing markets of optical image stabilization, or OIS, and wearable and fitness devices. Moreover, its investments in R&D were successful with the introduction of several industry firsts and highly-differentiated solutions. These unique solutions of InvenSense allow it to command premium value for its products, and maintain stable gross margins, while also giving it further space for improvement. InvenSense is focused on becoming a MotionTracking solutions company that offers entire range of motion and audio system-on-a-chip, or SoC, and embedded software.
The company has witnessed continued strength in China, with both its 6-axis MotionTracking solutions and the 2-axis optical image stabilization products gaining solid traction. Its gyro attach rates also increased in mid- and high-end smartphones such as Xiaomi and OPPO. The company also said that many high-end brands are increasingly using OIS in their smartphone, which will allows InvenSense to capture additional content.
Why Apple is a possibility
This might be an indication toward Apple. There's a probability that Apple might use OIS sensor in the upcoming iPhone, and InvenSense might be the supplier of choice. As reported on BGR:
"Apple's iPhone 6 camera may come with optical image stabilization technology from InvenSense, a report from The Motley Fool says, in addition to other sensor components from the chip maker.
Without confirming whether it will provide components to Apple's new iPhone, InvenSense CFO Alan Krock said during the company's third conference call that "in our fiscal 2015, we are well positioned to enjoy a year-over-year rate of (revenue) growth similar to the past two fiscal periods of between 25% to 35%. This outlook opportunity excludes potential market share gains or losses."
The Motley Fool believes this is an indication InvenSense may provide certain components to the iPhone, on top of its existing contractual obligations to other smartphone makers. The company provided about "50% of Samsung's design wins," amounting to 157 million component units of the total number of 314 million shipped Samsung smartphones."
More than just Apple
But, Apple is not InvenSense's only driver. The company has recorded volume shipments in several flagship customer products such as Samsung's (OTC:SSNLF) Galaxy S5 and wearable devices like Samsung Gear 2 and Gear Fit. The 6-axis products, which include the MPU-6500 and 6515 Android-compatible products, accounted for greater than 70% of unit shipments last quarter. InvenSense experienced an acceleration of customer design wins with its MotionTracking SoCs, which utilize its Digital Motion Processing, or DMP, and its motion algorithms, MotionApps.
The company is also increasing its investment in R&D for new product development, expansion of its software, and algorithm capabilities to extend its competitive differentiation, along with increasing costs associated with extensive new customer qualification activities.
During fiscal year 2014, InvenSense invested in new customer qualification and test activities, which are expected to yield solid growth and market share gains in fiscal 2015. The incremental opportunity for InvenSense is pretty exciting, and its design wins from these efforts signify its technology leadership, along with its customer support and operational excellence.
Looking ahead, InvenSense targets on increasing its production for third-generation ultra low-power MotionTracking SoCs that include MotionTracking features with self-calibration and integrated sensor fusion. There's rapid adoption of these SoCs at existing customers, apart from several new customers where it had no content earlier. InvenSense is also encouraged by several other market and product dynamics that are believed to contribute to its growth for the next several quarters, apart from increasing market share.
Fundamentals and conclusion
InvenSense's trailing P/E and forward P/E ratios of 345 and 24.90, respectively, represent robust earnings growth. Moreover, for the next five years, InvenSense's bottom line is expected to grow at a terrific CAGR of 22.40%, better than the industry average of 15.20%. So, InvenSense looks like a good buy going into earnings, as its long-term prospects are strong and the company's products are finding adoption at several customers.
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