Immersion Corporation: Turning a Corner

| About: Immersion Corporation (IMMR)
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Immersion Corporation (NASDAQ:IMMR) is at a turning point as a company. They are finally moving into the world of profitability, and the technology they own is catching on in areas that offer the company a lot of opportunity.

Investors have taken notice and have sent the shares skyrocketing 200% over the last year. This new higher valuation is dependent upon the company growing their top and bottom lines quickly.

At a market cap of $457.5M, subtract about $135M from the Sony (NYSE:SNE) payout and you get $322.5M. Divide that by estimated revenue of $33M for 2007, you have a stock that is trading at almost 10 times its revenues. Based on current estimates, they're expected to grow revenues at 20% per year and have a whopping .04 cent profit next year. Clearly if this was the whole story it would not be a very attractive investment.

The rest of the story goes like this: in addition to the Sony upfront payment the company will continue to get proceeds from Sony on a quarterly basis. The are looking at $1.875M per quarter for the next three years, in additional payments from Sony as part of the agreement. They are also receiving an additional $750K a quarter for the next 10 years. Those payment would have resulted in a 41% increase in IMMR's last quarter earnings.

This data has helped Immersion on its upward climb, but it was just last week that Nokia (NYSE:NOK) signed an agreement to use their technology in some of their phones. The terms have not been disclosed yet but investors are betting that it is going to be big. Now all of a sudden there is the possibility of this company having huge revenue and EPS growth and plenty of cash sitting around in the bank.

They are also working with companies that build NAV systems (like the navigation systems in cars); they use their technology in some medical devices and license it to gaming hardware and software makers. The hot stuff right now, though, is in the smart phones, with Samsung and Nokia and hopefully some more names to follow.

This is why I went long IMMR even way up here. The potential is huge. The estimates are also way too low as they have not taken into account the new business.

However, with the quick spike that it has had, if the contract doesn't live up to expectations or they can't generate new business deals you could see the recent gains given back quickly. Also, Microsoft (NASDAQ:MSFT) is trying to get $25M or so of the Sony settlement due to dealings done some time ago; while I do not think that they will get it, even if they do it should not be bigger then a $1 point hit on the stock.

Disclosure: Author has a long position in IMMR

IMMR 1-yr chart