Making Sense Of InvenSense And STMicroelectronics NV

| About: InvenSense (INVN)
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At first glance, InvenSense (NYSE:INVN) looks like an intriguing investment opportunity. It is debt-free and has $159 million in cash. Its profit margin is 23.6%. Insiders own 40% of the company. In 2012, InvenSense either hit its quarterly earnings projection or beat it by at least 10%. From 2009 to 2012, InvenSense revenue grew over 400% from $29 million to $153 million. Earnings per share (EPS) more than quadrupled from $.08 in 2011 to $0.39 in 2012. Analysts project a long-term EPS growth rate of 22%. Its YPEG calculates to $16.50, providing greater than 50% upside from recent prices. Yet, the InvenSense share price has been in a decidedly downward trend since February 12th.

InvenSense is yet another chip maker. It has trademarked the monikers "MotionProcessing", "MotionApps", "MotionProcessor" and "MotionTracking". InvenSense provides motion processing solutions. Motion processing includes the detection, measurement, synthesis, analysis and digitization of an object's motion. It combines technologies such as accelerometers (that measure acceleration) and gyroscopes (that measure orientation) with integrated circuits into micro-electro-mechanical systems (MEMS). Put simply, though not simple at all, MEMS convert physical forces into digital information.

If you're thinking video gaming, you're right on track. In fact, in 2010, Nintendo accounted for 85% of InvenSense's revenue as it supplied product for Nintendo's (OTCPK:NTDOY) Wii systems. Specifically, InvenSense provided MEMS for the Wii MotionPlus accessory, the Wii Remote Plus controller and the 3DS gaming console. Besides gaming, InvenSense products are used in smartphones, tablets, remote controls, cameras and digital televisions. From 2010 to 2012, InvenSense broadened its customer base to include companies like Acer, Asus, HTC, LG Electronics, Motorola (NYSE:MSI), Pantech, BlackBerry (BBRY), Samsung, and ZTE. Nintendo's contribution to InvenSense revenue has decreased to 31% while Samsung and HTC have increased to 12% and 15% respectively.

The obvious player missing from the customer list is Apple (NASDAQ:AAPL). According to iPhone disassemblers or crackers, Apple is committed to MEMS chips from STMicroelectronics NV (NYSE:STM).

STMicroelectronics NV is the largest European semiconductor manufacturer with a portfolio encompassing every major category of device. ST is a 50% shareholder in ST-Ericsson, a wireless chip joint venture with Ericsson (NASDAQ:ERIC). On December 10th, 2012, ST announced it would exit the ST-Ericsson JV. The transition period is expected to last until the third quarter of 2013. On March 18th, ST announced it had failed to find a buyer for its stake in ST-Ericsson and the venture dissolved. In December, ST unveiled a strategic plan reflecting its path forward absent the ST-Ericsson wireless chip business. It committed to a focus on five areas where it was already experiencing strong leadership: a) MEMS and sensors, b) smart power, c) automotive, d) micro-controllers, and e) application processors and digital consumer products. Besides Apple, ST's top customers are Blackberry, Bosch, Cisco (NASDAQ:CSCO), Continental, Hewlett Packard, Nokia (NYSE:NOK), Samsung (OTC:SSNLF), Sony (NYSE:SNE), and Western Digital (NYSE:WDC).

InvenSense acknowledges STMicroelectronics is its primary competitor and both battle over patent rights. But, InvenSense and STMicroelectronics are not the only integrators in the field. Freescale Semiconductor (NYSE:FSL), Analog Devices (NASDAQ:ADI), Hewlett Packard (NYSE:HPQ), Sony, Panasonic (PC), and Texas Instruments (NYSE:TXN) are a handful of publicly-traded MEMS manufacturers. Long before gaming and smart phones, MEMS technology was utilized in inkjet printers, automotive airbag systems, and industrial controls for defense and aeronautic applications. Innovation has expanded the field to resonators, oscillators, filters, duplexors, radio frequency switches, microphones, compasses, and environmental sensors for temperature and humidity.

As well, applications have expanded beyond the traditional and even beyond gaming and smart phones. Portable, wearable health care devices for measuring and monitoring a patient's vital data utilize MEMS. Or, consider how using the ability to detect changes in motion and orientation combined with wireless technology has enabled wireless crash sensors to be incorporated into football helmets. Questionable impacts from the action on the field can be transmitted to and monitored from the sidelines.

From the aspect of an industry where opportunities continue to present themselves and unfold, a MEMS manufacturer should be an appealing investment option. For STMicroelectronics, 2013 will be a transitory year. ST has a less comfortable debt position than InvenSense with $1.3 billion outstanding. However, its cash position is a healthy $2.49 billion. ST expects to pay an annual dividend of $0.34. Still, ST reported losses for the last five quarters and expects to continue to report a loss through most, if not all, of 2013. Analysts project exiting the wireless business will improve ST's financial performance in 2014. Still, a long-term growth rate of just 5% annually is expected. On March 26th, ST signed a new credit facility with the European Investment Bank which is expected to support ST's research and development activities.

On the other hand, InvenSense has an impressive track record, cash on the balance sheet, no debt and healthy expectations of growth. But the stock price does not attest to such positive traits. Rather, it hints at doubts. The first hint reviews the last six months and the 47 insider sells totaling nearly 5.5 million shares, the majority being automatic, that have weighed on the share price. The second hint involves the video gaming market that has provided InvenSense with a significant portion of its revenue. It was dispiriting on November 27, 2012 when ST announced Nintendo would use an advanced sensor solution in its latest version of the Wii, the Wii U, from ST and PNI Sensor. It should be noted, however, that as far back as 2006, both ST and InvenSense, have been providing Nintendo with MEMS. Still, in its last quarterly earnings conference call on January 23rd, InvenSense acknowledged a decrease in gaming-related revenue. On a positive note, smart phone and tablet revenue increased with some strength attributable to its largest customer in that segment, Samsung. Samsung is expected to be a 30+% customer in the fourth quarter of fiscal 2013 ending March 31st. Then, on March 14th, the latest hint pricked up when Samsung announced its fourth generation Galaxy S4 with Atmel (NASDAQ:ATML) providing the sensor hub. InvenSense had provided the MEMS motion-tracking in the S3. As expected, analysts' yearly target resets started rolling in.

STMicroelectronics initiated and planned its rocky path through 2013. On the other hand, InvenSense is being dealt bad news and unexpected obstacles at every turn. Neither have time to stall out as their industry and livelihoods depend on their ability to innovate and bring performance, reliability, or integration advancements to market. But, oddly enough, in their private competition, both could be classified as the underdog.

For the long-term investor not prone to motion sickness, with an appetite for risk and time enough to trudge down a challenging path, both companies have potential. For STMicroelectronics, monitor its executions on all fronts - its five focus areas and its exit from ST-Ericsson. Any stumble will delay its return to profitability. Watch for an expanding product portfolio and a growing customer list (with maybe even Apple included) at InvenSense. Without both, InvenSense could wither. Unfortunately, for the investor looking for more probability than possibility regarding price appreciation, neither company makes sense - at least right now.

Disclosure: I am long CSCO, AAPL. 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: I belong to an investment club that owns shares of Cisco and Apple.