Is Overvalued InvenSense A Sell Going Into Earnings?

| About: InvenSense (INVN)


When InvenSense released it Q1 results, the stock was punished because the company missed the estimates on earnings.

The weak quarterly results of Samsung indicate that InvenSense may miss on earnings estimate again.

Rumors suggesting that InvenSense has landed a spot in Apple have resulted increased its share price. However, landing a spot in Apple won't effect Q2 earnings.

A trailing P/E of 345 suggests that all the good news is already baked in InvenSense's stock price.

Thus, investors should sell InvenSense before the earnings.

Sensor making company InvenSense (NYSE:INVN) had disappointed investors when it released its quarterly report for the first quarter. InvenSense missed the analysts estimates on earnings by a big margin and revised its guidance on earnings downward. As a result, shares fell 14% overnight. InvenSense is set to release its 2nd quarter earnings report this week, which raises the question if or not you should sell InvenSense before the earnings. Let's find out.

What is the Street expecting?

Analysts' expect InvenSense to report earnings of $0.08 per share on revenue of $64.5 million. Although this means that the revenues will jump 15.5% y-o-y, the earnings are expected to drop nearly 40% from $0.14 per share last year to $0.08. This is still at the high-end of InvenSense's guidance range. Before the end of Q1, analysts were expecting InvenSense to report earnings of $0.16 per share, however they had to lower their expectations because InvenSense dropped its guidance range to $0.07-$0.08.

So, will the company be able to meet the expectations on revenue as well as earnings? Well, I don't think so. That's why I think investors should sell InvenSense going into earnings. Let's take a look at the reasons why I think InvenSense will report another disappointing quarter.

Pacific Crest is wrong about InvenSense

Pacific Crest recently reported that InvenSense is a buy ahead of the results. InvenSense's shares got a boost as a result of this report, however Pacific Crest cited adoption of InvenSense's optical image stabilization product in the 5.5 inch iPhone 6 as the primary reason for buying it before the earnings. I think this judgment is flawed as InvenSense hasn't officially landed a spot in Apple (NASDAQ:AAPL), yet. The 5.5-inched iPhone 6 is expected to enter mass production is August as Apple is primarily focusing on the 4.7-inched version as of now.

Moreover, even if InvenSense does penetrate into the iPhone 6, it still won't have any kind of impact on InvenSense's Q2 earnings as the iPhone 6 is expected to hit the market in the third quarter. This is because InvenSense's days of sales outstanding is almost 80. This means InvenSense takes 80 days to collect revenue after a sale has been made (it may be more as Apple is a big company). So, even if I assume that InvenSense has landed a spot in Apple and that Apple has placed orders with InvenSense for the 5.5-inched iPhone 6, it will still have no impact on InvenSense's Q2 earnings. Thus, I don't think investors should buy InvenSense ahead of the earnings report.

Why InvenSense is a sell…for now

More importantly, InvenSense derives nearly 30% of its revenue from Samsung (OTC:SSNLF). The smartphone giant is the main purchaser of InvenSense's 6-axis products, and it reported a weak quarter as well, which is why I am highly skeptical about InvenSense's earnings report.

Samsung's operating profit dropped 24% y-o-y to $7.1 billion, largely missing the consensus estimate of $8 billion. What's even more important is that Samsung's smartphone shipment dropped considerably on a sequential basis. Samsung only shipped 78 million units in Q2 as compared to 87.5 million in Q1. Analysts believe that this Samsung's inability to "differentiate" its products from Chinese rivals is the main reason for this drop.

Moreover, as per Apple's latest quarterly report, the company sold 35.2 million iPhone units, up 13% y-o-y. The soaring sales of the iPhones must have negatively impacted the sales of the Samsung Galaxy S5 and this will further harm the quarterly sales of InvenSense.

Valuation too high and insider selling

InvenSense's trailing P/E of over 345 is the highest amongst its peers and is too high to be justified. Moreover, the P/S ratio of almost 9 also signifies overvaluation. Thus, I think InvenSense is ahead of the earnings. Also, InvenSense's VP Daniel Goehl recently sold 12,345 shares of InvenSense stock on the open market in a transaction dated Tuesday, July 22nd. An insider selling shares just a few days before the quarterly report suggests that the company's earnings may be disappointing.


InvenSense's shares were punished the last time it reported a bad quarter and the reasons mentioned above indicate that the same may happen again. Thus, I believe investors should sell InvenSense ahead of the earnings report. Moreover, the overvaluation suggests that now is not the correct entry point and investors can also use the post-earnings drop to buy InvenSense.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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