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After the close on Tuesday, InvenSense, Inc. (INVN) reported earnings that, combined with the replacement of the CEO, sent the stock down as much as 20% at one point. This once high flying maker of motion sensing technology continues to struggle with forecasting the actual market growth of its products.

In previous quarters, the company spoke of a bright future interrupted by a chip shortage from Qualcomm (QCOM) limiting the ability of handset makers to utilize the motion sensing technology for 4G LTE phones.

Now the Q2 2013 earnings ending in September slightly beat estimates, but the company guided towards a weak December quarter. While still guiding strong yearly growth of 35%, the market is clearly disappointed that the higher end 40% growth rate wasn't reached.

As during the past quarterly reports, the absolute performance remains strong, but the question remains whether the relative performance will be enough. The market has a funny way of only being concerned with the comparison to analyst estimates no matter the growth rate or valuation.

Q213 Earnings Highlights

Below are the highlights for the Q2 2013 earnings report:

  • Second quarter of fiscal 2013 net revenues: $55.3 million
  • Second quarter of fiscal 2013 net income: $13.7 million
  • Second quarter of fiscal 2013 diluted earnings per share: $0.16
  • The company ended the quarter with $166.4 million in cash, compared to $157.8 million at the end of fiscal year 2012.

InvenSense slightly beat the analyst estimates of $0.15 with the reporting of earnings hitting $0.16. Also worth note is that the company doesn't report non-GAAP earnings that exclude stock based compensation of $2.0M. Most technology stocks exclude these numbers so comparative earnings would be roughly $0.18.

Guidance

The company guided to $57M to $59M for Q3 2013. While the 3% to 7% sequential growth would appear strong, analysts expected a much stronger jump to $66M. Net income is expected to slightly increase suggesting earnings per share will reach $0.17.

The CFO commented that due to lower gaming revenue, the company will see less of a seasonal jump during the December quarter and less of a typical sequential decline in the March quarter.

Market Potential

The market for MotionTracking technology appears unlimited at this point. While smartphones and tablets now account for the majority of revenues, the company sees the potential in the smartTV market, optical image stabilization for cameras, industrial solutions and wearable sensors.

Besides these new market segments, the company expects to eventually secure all smartphone makers, which undoubtedly includes Apple (AAPL) as the primary target. Per the CFO, Alan Krock, on the earnings call:

We cannot provide anything further other than the stated goal, which we have said many times. We seek and believe that we will serve all customers in the smartphone and tablet market.

With Samsung accounting for roughly 20% of revenue in Q2, a deal with Apple would provide a substantial boost to revenue forecasts. The clear guidance is that the company expects some deals during Q4 that could increase revenue guidance.

CEO Replacement

With a rough history of being a public company, the board of directors apparently made a decision to remove the founder from the CEO position. Not being an odd occurrence as many founders struggle with taking a company from private start-up to billion-dollar valuation. Dealing with Wall Street can be tough for many executives, especially ones without experience running a public company.

Effective on October 24th, Behrooz Abdi took over as CEO. He has experience at NetLogic Microsystems, Inc., RMI Corporations, and more importantly the Senior Vice President at Qualcomm, Inc. .

Most importantly, the founder will remain on the Board of Directors to help with directing the company.

Valuation

At a valuation of only $950M, the stock provides a strong relative value to other technology stocks that trade at substantially higher multiples. Even at the reduced revenue forecasts, the stock trades at less than 4x next year's revenue forecasts. With expectations for 30%+ growth excluding the potential for adding Apple as a client, the stock provides a compelling valuation.

As mentioned previously, the company only provides GAAP numbers. Using comparative numbers to other tech companies, the non-GAAP or adjusted earnings would exclude the $2.0M of stock based compensation making the Q213 earnings actually $0.18. If one assumes as much as a $0.10 impact for FY14, the stock is only trading at 13x estimates of nearly $0.90. A normal 30 multiple would place the stock at $27.

Conclusion

This stock remains one of the cheapest technology stocks especially compared to growth estimates. The market remains too focused on relative performance as opposed to absolute performance. In essence, it doesn't appear to matter to the markets if numbers grow by 35% if they don't match estimates.

While the quarterly reports continue to be a source of frustration for existing investors, the potential growth and the promise of a new CEO with more market savvy hold great future for this company. Any ability from the new CEO to convince the market that growth next year will exceed 30% and the stock will be one of the best performers in 2013.

Disclaimer: Please consult your financial advisor before making any investment decisions.

Source: Sensing The Valuation Potential Of InvenSense