InvenSense - Possible Apple Partner And Play On Wearable Technology

| About: InvenSense (INVN)
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INVN has received a lot of coverage this year - does it warrant a place in your portfolio?

This is a smartphone technology stock that is positioned to participate in sector growth for years to come.

Wearable Technology, possible Apple affiliation, and China exposure are three key points to consider with this stock.

The technology industry can be a challenging sector for investors. Perhaps the best way to describe it is with a popular saying: "The one constant is change itself." Plenty of analysts and investment firms scour through stock ticker symbols looking for the next Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), or Google (NASDAQ:GOOG).

I couldn't help but notice the Motley Fool's recent note about a company that could be the next top performer. If you're a diehard Apple fan, wouldn't you like to know who its next huge inside supplier is? Rewind the clock and take, for example, the desktop computer or the cell phone you have within inches of your hand right now. Put Apple, Sony (NYSE:SNE), or IBM (NYSE:IBM) on the shelf for a minute and think about investing in the next company that has a stake in every sale regardless of the brand you choose. In other words, buy the "chip" or technology that's inside of each device, instead of trying to figure out which phone or computer manufacturer is going to win the battle.

That's what InvenSense (NYSE:INVN) is all about; investing in companies like this is a vote for what is next on the road to technological advancements and trends that consumers are hungry for. It wasn't that long ago that the tablet burst onto the scene. Now that seems "old hat" as companies are racing to deliver wearable technology with smart watches and web-based glasses -- it's exciting to imagine what's coming next. In order to find a leader in the technology space, investors should look for where the next great idea or cutting edge technology is coming from, but also which company will help them get there. They shouldn't solely focus on the end product.

A company that has recently caught investors attention is InvenSense. This stock has taken its shareholders on a roller coaster ride the last several years. Year to date it is down 10.5%, but it has posted a three-year annualized return of 15.77%. The analyst community currently has recommendations on INVN all over the board, with all them averaging out to a "moderate buy."

Company Summary

InvenSense was founded in 2003 and is based in San Jose, Calif., just a three-iron or so away from Apple. Once you start connecting some dots, you will quickly see that INVN is moving and positioning themselves in the right area.

President and CEO Behroos Abdi brings a solid track record and years of industry experience to the company. InvenSense develops, designs and markets micro-electronic mechanical systems (MEMS) gyroscopes for motion tracking in consumer electronic devices. Some common devices that their multi-axis gyroscope technology can be found in are smartphones, tablets, video gaming systems, cameras, smart televisions, navigation devices, health and fitness devices, and toys. INVN splits its technology into four different groups: Mixed-Signal Circuitry, Nasiri-Fabrication, Advanced MEMS Gyroscope and MotionProcessing Library/MotionApplication Software.

The company's primary competitors are Sony, STMicroelectronics N.V. (NYSE:STM), Epson Toyocom Corp., Freescale Semiconductor (NYSE:FSL), Rohm Co. (OTCPK:ROHCY), Panasonic Corp. (OTCPK:PCRFY), and Robert Bosch GmbH.

Fundamental View

On May 1, 2014, INVN released its quarterly numbers with mixed reviews. Earnings came in at $0.07, missing consensus estimates of $0.10. Guidance going forward also was lighter than what investors where looking for as the company announced it expects revenue to be between $63 million and $66 million in the first quarter, while the consensus estimate was for $69 million. With a price currently at $18.42 per share and the trailing P/E ratio a robust 269, it's not surprising that investors put some selling pressure on the stock with the recently announced numbers. The forward P/E ratio comes in at a more attractive and realistic number at 19.77.

The company remains confident moving forward with strong leadership and cutting-edge technology. Leadership stated that they have seen an increase in the use of their gyroscopes in several different applications. They also have a strategy moving forward to develop a new generation of "always on" context aware applications and provide low power usage with increased performance in future products. With a new trend in the technology space to wearable devices (glasses and watches), INVN is extremely well positioned to be the leader in this space.

Currently, 40% of the INVN's revenue comes from the smartphone market. Their three largest customers are: LG (LG), Samsung (OTC:SSNLF), and Xiami. Currently, INVN's motion-tracking chips are being used in the Samsung Galaxy S5 phone, which has been very well received by consumers around the globe. With China introducing LTE (Long-Term Evolution, 4G) there is a huge opportunity for INVN as Chinese consumers will be upgrading their older phones to "new generation" 4G units.

Rumors continue to spread that INVN will be chosen as the provider for the OIS (optical image stabilization) in the new Apple iPhone 6 that is expected to be released later this year. If this does come to fruition, INVN shares could quickly rise due to the increased revenue and earnings that would result from a relationship with Apple.

With the recent pullback in price due to their weak quarterly results, investors could be presented with a very attractive buying opportunity. They currently have an impressive customer base and with the possible addition of Apple and expansion into China, the future returns for INVN could be massive.

Technical View

The stock is currently trading around $18 per share with a 52-week range of $11.88 to $24.34. It is approximately 24% below its 52-week high and 59% above its 52-week low. While the most recent announcement was not what the market was looking for, it was certainly not devastating. The current P/E ratio indicates a significant premium when compared to the industry average of 24.9, but again, buying this stock is a bet on what's ahead. That's unlike an energy or utility stock where you're likely content hitting singles and getting a sleepy dividend each quarter.

The stock recently has moved below its 200-day moving average (INVN chart). Over the last two years, every time it has dipped under the 200-day moving average it has bounced back with attractive returns. Recent price movement has driven the stock significantly below its 50-day moving average, and I believe this could be a tremendous entry point to pick up INVN "on sale."

Buy, Sell or Hold?

Both the fundamental and technical analysis indicate that INVN is not currently a stock that traditional investors are rushing into at this time (that could be great for you). The challenge with a stock like this is that you can't solely evaluate it on past data and returns. You have to look forward and attempt to anticipate where the market is going and where future opportunities will be presented.

I am currently looking at INVN as a buying opportunity that offers investors considerable upside. Patience will need to be exercised, but when the stock does move it will most likely do so quickly, so you'll need to be nimble. As with any recommendation, it's important to remember that I am not aware of your personal situation or risk tolerance. So, obviously it's best to consult with your financial advisor to see whether this is a specific fit for your portfolio or not.

I believe that the future for InvenSense is bright and offers considerable upside to investors. If a contract materializes with Apple, INVN will explode. But, playing devil's advocate, let's say nothing happens with Apple -- this company is still a viable leader in the wearable technology space, and a substantial opportunity will be presented via the huge population and shift in China upgrading their mobile devices. Don't ignore this reality, because it is real.

I am a buyer of this stock on any market dip/correction. In my opinion, here's the bottom line on wearable technology: It's much like true love: "Don't buy what's on the outside -- buy what's on the inside."

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.