Update: InvenSense Acquisition

| About: InvenSense (INVN)


InvenSense has purchased two motion processing startups.

The acquisitions show how InvenSense is still at the beginning of the transition I predicted, and raises some key figures to look for in the upcoming earnings call.

The market action surrounding the announcement also gives some cause for concern.

Back in October, I correctly predicted that InvenSense (NYSE:INVN) would transition itself into an SoC designer. The company's recent $81M purchase of Movea and TPI, two motion processing tech firms, shows just how long a road that will be. Management says they will give more detail on the financial impact of the purchase at their next quarterly report, due around the end of the month. However, a few points can be deduced immediately. Unlike the ADI microphone purchase, these acquisitions will almost certainly NOT be accretive to earnings anytime soon; Movea seems primarily a patent buyout, and TPI represents uncommercialized indoor location algorithms that will need to be vetted and gradually integrated into future products. In terms of financial metrics, the $6M of shares issued for the purchases comes to less than one-third of one percent, which is trivial dilution to shareholders. On the other hand, the $75M cash portion of the purchase represents another big hit on the balance sheet, costing over 64% of the remaining available cash and liquid assets. When earnings are released, investors will want to look carefully at two key figures: Goodwill and Total Debt. When I first wrote about INVN, over a year a go at less than half the price, InvenSense showed zeros for both of these cautionary financial figures. That is no longer the case, and while the amounts were not worrying before this purchase, they certainly bear watching.

Another concern is the price movement in advance of the acquisition announcement, which occurred at 4:52pm EST (and thus, after market close). INVN was up over 5% BEFORE the announcement on a day when virtually all other tech stocks were down markedly. There was no other news to account for this movement in the stock. I'd warned in comments of my most recent article that the stock price seemed to be getting ahead of itself once again, perhaps due to short covering. One time does not make a trend, and INVN did not exhibit this behavior in advance of the ADI purchase, so I'm giving InvenSense management a pass on this issue for now. Hopefully this behavior is not repeated, as investors do well to avoid companies with lax disclosure and/or corporate controls. French companies, like Movea, can be particularly troublesome for mergers or buyouts, as any long-time follower of Lucent (ALU) can attest. It's just one more potential red flag to keep in mind.

In the meantime, I remain bullish on INVN for the longer term, but cautious ahead of the next earnings report, which could easily be another disappointment. Such caution has proven to be well-warranted for this stock in the past. Management has already warned of a back-loaded year, and if the coming report merely meets consensus estimates of 8 cents per share, that would result in a P/E ratio of 45 at current prices. My first INVN article used the stock as a an example about using cautious measurements to pick your entry point for any stock. Now would be a good time to recall that lesson, rather than learning the hard way.

Disclosure: The author is long INVN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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