Why Investors Shouldn't Be Discouraged By InvenSense's Weak Earnings Forecast

| About: InvenSense (INVN)


Although InvenSense reported solid results, its earnings outlook for the full year wasn't up to expectations.

However, this is expected as InvenSense is investing in research and development to bring out new products, and the company's long-term growth forecast is on track.

InvenSense's products are gaining solid traction in the end market, with customers such as Samsung, LG, and Chinese companies adopting its solutions.

Chipmaker InvenSense (NYSE:INVN) came out with solid first-quarter results, satisfying analysts' estimates on the bottom line and exceeding revenue estimates. However, it failed to top off its first-quarter performance with a solid outlook. In fact, InvenSense's bottom line forecast for the full year fell behind Wall Street estimates by around $0.03 to $0.04 per share. But investors can take relief in the fact that InvenSense calls for revenue of $86 million-$91 million this year, well ahead of the $83.3 million consensus.

Since InvenSense is a growth-stage company, it isn't surprising to see that the company's bottom line performance might not be up to the mark. As it invests in research and development for growth to tap the smartphone and wearables market, the company's earnings might fluctuate in the short run. But the good thing is that it saw good revenue growth of almost 20% last quarter, which indicates that the company is effectively tapping its end markets.

New products will propel growth

Looking ahead, the company is working to bring its next generation products to the market to sustain its solid rate of growth. InvenSense has initiated the volume ramp of its third generation 6-axis MotionTracking SoC, the iP2600, for both new and existing customers. This extremely low power SoC platform utilizes the benefits of both the highly advanced gyro and accelerometer sensors, along with its third generation digital motion processor that runs on InvenSense's motion app software.

This solution has already been implemented into several mobile gaming and wearable products, and with the production ramp under way, things can get better.

Additionally, InvenSense is aggressively focusing on qualification activities for new customers. Besides, the company has been building inventory in the wafer form for key products such as the MPU-6500 and the MPU-6515. These operational investments will address demand from customers who are now increasing their production, so InvenSense has done the right thing by investing in the future.

InvenSense has differentiated itself in the smartphone market with cutting-edge camera image quality, which is driven by supplementary aperture control that provides sharper and brighter images. As a result, it is seeing increasing market share in mobile.

As already mentioned, many smartphones are leveraging its 6-axis MotionTracking solution and 2-axis OIS products. For example, Amazon's (NASDAQ:AMZN) Fire smartphone is also equipped with these sensors, and this is an endorsement of the company's product innovation. Moreover, InvenSense expects several new phones to be launched across markets going forward that will use these chips.

Looking ahead, as customers, particularly in China, are transitioning towards feature-rich smartphones with increasing gyro attach rates, InvenSense's addressable market is getting better. To tap this market, the company is trying to deliver composite motion, and other exclusive features with short lead times.

There's also rising demand for low power precision MotionTracking solutions for sports equipment, wearable devices, motion-based TV remote controllers, gaming controllers, and consumer drones. The automatic activity recognition software suite is gaining strong popularity as a result of these applications. Going forward, InvenSense aims at launching and monetizing a new generation of wearable products and related services to market.

Already strong without Apple

There has been chatter that InvenSense might become an Apple (NASDAQ:AAPL) supplier, but since this is still a rumor, it will be wise for investors to focus on its current product portfolio. InvenSense is doing good without Apple, witnessing healthy traction in China where its 6-axis MotionTracking solutions and 2-axis optical image stabilization, or OIS, products are selling well.

Additionally, InvenSense is progressing well across all of its major geographic regions, with the production ramp of chips for the Samsung (OTC:SSNLF) Galaxy S5 and the LG G3. Also, management claims to have recorded share gains at its customers, which is evident from the fact that more than 70% of the shipments in the previous quarter included its 6-axis product family, comprising of the MPU-6500 and MPU-6515 Android optimized products. So, InvenSense is already doing quite well without Apple, as it counts the major Android phone companies on its client list.


As mentioned earlier, InvenSense is a growth stage company. So, investors shouldn't be scared with its high trailing P/E ratio of 342. Strong earnings growth is expected from the company, which is why its forward P/E ratio is just 21. Also, for the next five years, it is estimated that InvenSense's bottom line will grow at an impressive annual rate of 25.6%. So, even though the stock looks expensive right now and trades close to its 52-week high, investors should continue holding the stock in their portfolio as it can deliver more upside in the long run.

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.