InvenSense, Earnings And The Market

| About: InvenSense (INVN)

Summary

INVN has hit all-time lows; reasons for the drop are examined.

The situation is examined against upcoming earnings with an eye towards both the short- and long-term market situations.

Of course, the latest technological and business developments are also discussed.

InvenSense (NYSE:INVN) has scheduled the earnings report on its fiscal third quarter for after market close on January 27. It will hold a conference call to discuss the results at about 4:30PM EST. On average, analysts expect the company to earn 18 cents per share on revenue of $118M; average expectations for current quarter revenue come in at $104M. In the meantime, INVN seems to be hitting new all-time lows each day. There are two primary reasons for this. One is worries over the weak Apple (NASDAQ:AAPL) sales that I had been predicting all along.

The combination of those worries and the general market movement are once again being magnified by options and speculation, just as they were after Qualcomm's (NASDAQ:QCOM) last earnings report. Options which expired on January 8th meant that ~360,000 shares were acquired at an average price of around $10.20. That's enough to push the stock down a bit on its own, but the monthly options which will expire this week show a huge concentration (12K) of puts at the $12 strike price, and plenty more below that. However, what's even more surprising is the volume of very in-the-money puts that have been trading hands even as new lows are reached. That could signal the return of institutional meddling in INVN's shares, and it shows interest in the stock has certainly not dried up.

Technology Update And Some Perspective

More broadly, what this means to me is that market is doing what it always does: fleecing the incautious while eventually rewarding those with disciplined approaches and correct long-term analysis. It's possible that INVN will bounce back after the options expiration, but valuation and fundamentals are always most important. Current valuation looks cheap, but only the earnings report will give confidence or denial on that point. Execution risk still remains, and over the long term, the real question is whether InvenSense is just a MEMs provider or something broader and more intelligent. In the former case, the company will always face pricing pressure from vertically-integrated competitors. If InvenSense can be successful in the latter endeavor, it should eventually trade much higher than today's prices. Nonetheless, if you want safety, you have far better alternatives than INVN. InvenSense has big plans that could easily fall flat. Here's a look at some of the latest developments, which I haven't mentioned on SA before:

  • Fitbit (NYSE:FIT) sued: Most market observers attributed the drop in FIT solely to the competition from and disappointment over the latest CES offerings. I do see multi-function wearables taking over from specialty fitness devices, but the biggest drop coincided exactly with the announcement of a class action lawsuit against the company over its PPG (photoplethysmography) heart rate monitors. I've already written about how the change in behavior of the Apple Watch documents the inaccuracy of this type of monitor for exactly Fitbit's use case. Fitbit is an InvenSense customer, but INVN does not make heart rate monitors. Rather, it offers a method of correcting the readings from this very broadly used sensor so that it can be more accurate during exercise. Thus, this development is actually a positive for InvenSense.
  • New chips: Of course, InvenSense was active in its own right at CES. In addition to demonstrating the many new technologies I've covered in the past, the company introduced a slew of new chips:
    • The OIS product line has two new offerings with the main improvements being better performance and a lower profile, thereby helping to enable slimmer mobile devices.
    • InvenSense has also partnered with Asahi Kasei Microdevices to include AKM's new magnetometer in its third-generation 9-axis motion tracking device, the ICM-20948. InvenSense claims this is the world's lowest-power, highest-performance 9-axis SoC.
    • Another addition to the Firefly line is the ICM-30631, which is targeted at wrist-worn fitness devices and includes the new heart rate monitoring functionality, in addition to sleep quality analysis, calorie counting, speed/distance, gestures, etc.
    • Finally, the MOD-1600 is targeted at drones, head-mounted displays and IoT applications. The main improvement here seems to be stabilized performance in the face of varying temperatures, which I could see as being important for high-margin military applications. It claims to be the industry's smallest 6-axis motion tracking module with such capabilities.

What To Look For And Conclusion

All of these developments are significant. None of them will be of much comfort to investors who are now heavily in the red. I see earnings and guidance as the proving point for new management and thus a likely inflection point for the stock. Recent ExOne (NASDAQ:XONE) notes should make it clear that inflection points aren't always positive, and no bottom (except zero) is forever. Nonetheless, I do think the hybrid valuation, which is now below 10, makes for more potential upside than down in this particular case. If management has been conservative with its estimates and spending, a rebound could easily be immediate.

To that end, I will be taking a hard look at the CapEx. If endeavors like Coursa are relatively cheap, then it's hard to see the stock as anything other than cheap right now also. Consequently, while the market might react badly to an earnings or guidance miss, I would have to think that any further downside will eventually be amended. However, if management is spending away the company's hard earned cash flow, then risk increases linearly with expense. I expect the market to behave much differently in 2016 than it has for the past three years. InvenSense has built up an impressive array of both technologies and clients even while rebuilding the balance sheet to more than net $3 per share; in the past year, Quick and Current ratios have risen to over 4 and 5, respectively. Now is a time when courage could be handsomely rewarded, but it's always more important to invest carefully.

Disclosure: I am/we are long INVN, QCOM.

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.

Additional disclosure: My long term outlook on QCOM has not changed, but there is a point where even a value trap (temporarily) becomes a value.