Immersion: It's Time To Get Personal With This Undervalued Haptics Company

| About: Immersion Corporation (IMMR)

Summary

Haptics will play a significant role in the future as wearables and consumer electronics become more personal and interactive.

Immersion has a healthy balance sheet of just under $2.50 per share of cash on hand and no debt and remains cash flow positive from operations.

The recent market selloff took a 50% bite out of Immersion's share price in less than 12 weeks and now shares are trading at a significant discount to fair value.

The forecasted growth (29% CAGR through 2019) for wearables by IDC over the next years provides additional near-term growth catalysts for Immersion.

immersion Haptics comes from a Greek word that means "of or relating to the sense of touch." For our purposes, it is the science of using the sense of touch to control or interact with computer applications. One company that is at the forefront of haptics is Immersion (NASDAQ:IMMR). Shares of Immersion have recently visited the woodshed and shares old off over 50% in less than 12 weeks, but fundamentals and the future for this company remain strong and very promising.

Immersion is the leading innovator in haptics technology with over 1,200 issued or pending patents in the US and other countries. Immersion's TouchSense technology provides haptics in mobile phone, automotive, gaming, medical and consumer electronics products from world-class companies. Immersion's Haptic Development Platform simplifies the design and implementation of haptic effects for developers while ensuring the haptics are optimized to play on all Android devices. Using Immersion's high-fidelity haptic systems, partners can transform user experiences with unique and customizable touch feedback effects, excite the senses in games, videos and music, restore "mechanical" feel by providing intuitive and unmistakable confirmation, improve safety by overcoming distractions, and expand usability when audio and visual feedback are ineffective. (Source Immersion)

Immersion derives a majority of its revenue from license royalties driven by unit sales of devices that use its haptics technology. Immersion continues to land deals outside of mobile phone manufacturers and has seen renewed interest in mobile gaming applications. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is one company that has partnered with IMMR for mobile gaming applications. Like most new product offerings, these will take time to bear fruit.

Smartphone industry sales have reached critical saturation levels with saturation levels across the entire smartphone industry expected to reach 91% in 2016, according to IC Insights. By 2019, the saturation level will reach 94%, which puts consumers in a replacement only mode and ends the days of easy money associated with new smartphone users. One way for smartphone manufacturers to differentiate their product offerings and remain competitive is by offering haptics technology through Immersion at a cost less than $1 per unit.

Haptics applications are growing in popularity. The technology will continue to evolve as electronic device manufacturers seek to differentiate products and broaden the user experience. Medical device manufacturers will continue to adopt haptic technology, which improves training, simulation, diagnostics and surgical procedures. Immersion's technology will both drive and benefit from the adoption and increased attachment rate of haptics. Apple's (NASDAQ:AAPL) Watch was referred to by many as the haptic engine, which allows users to interact with their device on a personal level. To this date Apple has yet to be confirmed and the only companies that know the status of a potential license between companies is Immersion and Apple.

The next wave of devices expected to adopt haptics technologies are wearable health and fitness devices. They will stimulate tremendous growth in Immersion's top and bottom line. Demand from the wearables market, as well as haptics growth in the industries in which it is already engaged, should make Immersion a very rewarding investment during the coming years.

Chris Ullrich, Vice President of User Experience at Immersion, spoke about the Instinctive Alerts Framework to iDigitialTimes in March 2015. Although this interview is almost a year old the wearable market has grown rapidly over the last year and shows no signs of letting up. As more devices are sold under license with Immersion the more money the company makes.

Immersion designed the Instinctive Alerts Framework so that it is accessible for as many wearables as we can cover. Meaning not just smartwatches, but also smartbands, headphones, pendants, jewelry and just about any other device that boasts an actuator. (Chris Ullrich VP of User Experience at Immersion Source iDigitalTimes)

Wearble device shipments are expected to grow at CAGR of 29% through 2019 according to IDC. Wearable device shipments are expected to top 110m in 2016 and reach 215m units by 2019. Within the wearable device market the fastest growing segment will be smartwatches. Smartwatches are expected to grow at 44% CAGR with shipments growing from 21m in 2015 to 88m annually by 2019.

Digital advertising on mobile is an area that needs innovation to draw attention from mobile device users beyond the standard video ads that users mute or click to exit as soon as possible. Immersion also is going after traditional TV to reach viewers a different way through the launch of Immersion's TouchSense Engage solution for mobile video and advertisers to create haptic content. Immersion's launch partner was Showtime and the company recently announced its first tactile video program in China with LeTV.

Immersion's patent licensees include Alps, Atmel, Densitron, Laerdal, LG Electronics, Logitech, Microsoft, Nokia, Samsung, Sony and Volkswagen as well as several others. Immersion's technology is featured across several mobile phone manufacturers including Huawei, Sharp, Xiaomi and ZTE.

Automakers including Acura, Lexus, Cadillac, Aston Martin and Kia/Hyundai use Immersion technology. Immersion recently confirmed additional auto design wins including new implementations and broader deployments with Audi, Mercedes, Acura, Cadillac and Lexus, as well as new agreements with major tier suppliers Continental & Tokai Rika. Immersion's customer base continues to expand across several industries and applications. Immersions US patent portfolio including issued or pending patents exceeds 2,000 as of January 1st 2016.

Immersion's balance sheet is healthy. The company sits on $67.2m ($2.40 per share) in cash and short-term investments as of the end of September 2015 with no debt. Over the last nine months Immersion has generated $12.3m of cash from operations. Immersion has not bought back shares in several quarters and the recent pullback in the share price presents the company and investors with an opportunity to grab shares at a discount to fair value.

My price target is $16 with upside to $20 if Apple is announced as a new win for immersion over the next 12 months. Analysts maintain and average price target of $16.20 for IMMR based on $66.7m of revenue and $0.40 EPS. The street high for 2016 is $69.5m and EPS of $0.58, which compare favorably with my own estimates of $0.62 EPS and $71.6m revenue. My expectation is that Immersion will deliver improved operational leverage and a reduction of legal fees in 2016 over 2015, which will drive up the percentage of revenue that reaches the bottom line.

Disclosure: I am/we are long IMMR.

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.