Immersion: The Market Leader Of Haptic Technology Plunged By 33% In 6 Months

Jan. 21, 2022 4:35 AM ETImmersion Corporation (IMMR)12 Comments
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Summary

  • The haptic technology industry is expected to grow at a CAGR of 14.5% from 2021 to 2027 according to PR Newswire.
  • IMMR issues with management, investor relations management, and litigations is limiting the value of the stock.
  • Immersion is putting less money into R&D, making some investors worried onto whether it will have a sustained strong future as market leader in haptic technology.

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Investment thesis

Immersion Corporation (NASDAQ:IMMR) (also IMMR from now on) splits people right down the middle. According to some investors, they are either a firm believer in its strong future or highly skeptical due to its many issues and poor management. Immersion Corporation is the market leader in haptic technology, a rapidly growing industry, and it seems to have well-protected intellectual property. Still, the stock has been down almost 33% over the last six months.

We have tried to dive deeper into the many issues of IMMR and value the stock. Our valuation is not unfavorable to Immersion, but it does highlight its issues with negative margins. We believe that with better management, this stock could again reach $8 to $9 per share value. We consider the share to be very high risk as of its current situation.

Immersion Corp: The market leader

IMMR creates, designs, develops, and licenses sensory technology, known as haptic technology, used in gaming to enhance the experience and the mobile and automotive industry. The haptic technology gives feedback through vibrations, forces, and motions. It is like 3D but for touch. In 2020 the mobile market accounted for 69% of Immersion's revenue, automotive market for 15%, console and PC gaming for 15%, and other markets, like the medical and adult, for a non-material part. The haptic market is expected to grow at a CAGR of 14.5% from 2021 to 2027, with the automotive market being a significant contributor to such a growth rate. IMMR was expecting double-digit percentage growth of revenue from 2020 to 2021 in the automotive and gaming segments and was on track as of Q2 2021.

IMMR made a massive success with its haptic technology in the DualSense controller to the PlayStation 5, which has sold more than 10 million units, despite chip shortages and logistic issues.

IMMR's part in the growing automotive market for haptic technology is uncertain. The development processes can last longer than four years but still hold an uncertain outcome for IMMR. They cannot know if its technologies will be used in the final product and the number of units sold, making royalties received very uncertain.

Valuation

We have chosen to value Immersion based on peer multiples, as revenues, expenses, and net income has been extremely volatile in the past few years.

IMMR has had high operating expenses in the past few years and a volatile operating margin varying between -130% and 48% since 2014. This is reflected in our multiples valuation as Immersion seems to be undervalued when looking at EV/revenue. Non-GAAP operating expenses are expected to not fluctuate as much in the future but stay within the $17-19 million range. Immersion could reach valuations closer to those given by the EV/revenue multiples with better margins. In IMMR's recent earnings call, the management said that they expect to see sustained profitability going forward.

Using average peers' EV/revenues, the implied share price is around $9,5, equal approximately 80% above market price. We, however, believe that share price levels of $8-$9 are reachable after a change of management.

Source: MOAT Investing

Issues/risks

Despite the bright future of haptic technology, Immersion seems to have some issues to overcome. Many investors are very unpleased with the management as it is lacking in communication and investor relationship management. Amid the Q3 2021 results release, an earnings report was released, but no earnings call was held, offering investors no opportunity to communicate questions and worries. The Q2 2021 earnings call and report were also criticized for not offering many colors to Immersion's current situation.

On November 3, 2020, Ramzi Haidamus left the position of CEO after a short tenure of fewer than two years. Upon his departure, Jared Smith, Vice President of Worldwide Sales, served as interim CEO until August 30, 2021, when Francis Jose was appointed CEO. He had been promoted just over three months earlier to General Counsel and Senior Vice President of Intellectual Property Licensing and Legal Affairs. The choice to promote Jose to CEO seems strategic given IMMR's litigation issues, which will be discussed further below.

The management is issuing shares to raise capital, but no information is given as to why, but in the Q2 earnings call, M&A was ruled out as one of the reasons. The accumulation of cash may be necessary to cover litigation costs.

On top of the management issues, the board of directors is investigated for a potential breach of fiduciary duties by Purcell Julie & Lefkowitz LLP, a law firm. Management and directors do not seem to have a positive outlook on the company's future, as insider trading shows them selling shares. In November 2021, Director William Martin and CFO Aaron Akerman have sold shares at prices between $6.76 and $7.20, whereas director Eric Singer bought shares at $5.21. William Martin has sold further sales in January 2022 at a lower price of $5.75. He has sold most of his shares and is down from over 2 million shares to just over 32 thousand.

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Open Insider

Source: Openinsider.com

IMMR involvement in litigations results in cash being tied up as contingencies. As of its Q3 report, Immersion has a long-term deposit of $6.9 million expected to be reimbursed by Samsung regarding a case with the Korean tax authorities. Immersion also finds itself similar to the Korean tax authorities and LG Electronics. In this case, the deposit is $5 million. A decision in the former case is expected from the Korean Administrative Court by February 2022. As for the case with LG, IMMR expects to be reimbursed by LGE upon a favorable outcome.

IMMR has filed an arbitration demand against Marquardt GmbH, claiming they owe royalty payments; the amount is to be determined. Marquardt has filed a counterclaim of $138 thousand.

The core of Immersion's business depends on its ability to protect its intellectual property. The duration of its patents averages 20 years. Immersion reported holding 1,700 issued or pending patents in its Q3 2021 report; in the 10-K 2020 report, the number was reported to be more than 1,900. In its efforts to protect its intellectual property, Immersion may have to take legal actions upon companies without a license to use its intellectual property. Examples of this have been seen as Immersion has filed lawsuits against Microsoft (MSFT) and Sony (SONY), where they have ended up reaching an agreement resulting in payments to Immersion.

On a similar note, as Immersion is very dependent on its patents and technology, innovation is critical. However, research and development expenses were declining and were in 2020 less than half of that in 2014.

Conclusion

With the bright future of haptic technology, the future of IMMR, the leading haptic technology company, should be cut out; however, this is not the case. Due to poor investor relations management, management issues, and litigations, IMMR seems to be in poor shape, and many investors are questioning its survival. Protection of patents and other intellectual properties is vital to its success, and so is continuous innovation as technology moves forward and patents expire. Despite this, IMMR R&D expenses have drastically decreased.

Even though our valuation shows potential upside, a purchase should be made with caution. As discussed, the future of IMMR is uncertain. Many investors are speculating as to what the management is planning. Our opinion is that Immersion is too high risk and not worth investing in with its current management. In case of a change of management and better investor relations communications, some value might be unlocked.

This article was written by

Moat Investing profile picture
1.49K Followers
We are a group of experienced investors that like to dig deeper into stocks to find growth stories at a reasonable price with strong economic moats. We also aim to conduct high-quality analysis by deep diving into valuations, key business drivers, risk/reward, and different future scenarios.

Disclosure: I/we have a beneficial long position in the shares of IMMR either through stock ownership, options, or other derivatives. 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.

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