Will The Samsung Patent Loss Impact InvenSense?

| About: InvenSense (INVN)

One of the weakest stocks following the patent verdict against Samsung has been InvenSense (INVN). The company makes motion-sensing chips mainly focused on the smartphone and tablet markets.

The stock weakness is probably warranted considering the focus on non-Apple (NASDAQ:AAPL) products highlighted recently by the Samsung (OTC:SSNLF) Galaxy 3S LTE smartphone and Google (NASDAQ:GOOG) Nexus 7 design wins.

Also the original guidance for the last quarter was weak due to the lack of Qualcomm (NASDAQ:QCOM) 8960 chips needed for the new 4G LTE smartphones. These combined facts highlight the growing dependence or at least perceived dependence on the Android operating system, including the Samsung product line.

Stock Reaction

The stock traded down for 7 consecutive days and 9 out of 10 days before and after the verdict against Samsung on August 24th. It closed at $14.02 on August 21st and eventually hit bottom at $12.02 on the September 5th.

At the $12.53 close on Monday, the stock trades well off the recent highs following solid guidance for the rest of fiscal 2013. Now the question remains whether the company will actually take a major hit if Samsung products are banned.

The following chart shows the stock price versus the Nasdaq Comp since August 21st.

InvenSense Vs NASDAQ

INVN Total Return Price Chart

INVN Total Return Price data by YCharts

Samsung Impact

As highlighted on the earnings call, Samsung remains a 10% customer. Any impact on Samsung of selling smartphones and tablets in the U.S. or around the world could have an impact on InvenSense. Last week, the company reported selling that 20M Galaxy S3 smartphones have been sold since launch in May. The good news for InvenSense is that only 20% have been sold in North America.

The bigger concern remains a wider impact to Android-based phones and tablets. The company specifically mentioned the Android tablet market as the growth opportunity for the rest of the year.

With the fast growing company focused on the latest mobile devices, the logic appears to disagree with any major impact going forward. Apple appears unlikely to get bans on the newest products and that's where the motion-sensing technology will see the biggest growth.

Also, it is very important to point out that the Samsung products are much more popular in Asia where any patent verdicts appear less impacting to Samsung.

This New York Times article questions the whole culture at Samsung. While the copycat culture allowed Samsung to succeed where previous innovators like Nokia (NOK) and Research In Motion (RIMM) failed, it also brings into question whether the company can innovate now that the business model is threatened.

Options Bet

OptionsMonster highlighted a very negative bet where an investor bought a significant amount of puts in expectations that the stock would slide back to 52 week lows around $8.25.

On August 28th, the monitoring system detected the purchase of more than 2,200 October 12.50 puts. The volume was 20 times previous open interest at the strike suggesting a new position.


The stock appears very attractive at these levels though the uncertainty exists. The market is very unforgiving of companies with earnings warnings even if it can be explained as a one time extraneous event.

Investors should look into purchasing partial positions at these levels with the plan of loading up if the stock gets hit from any warning induced selling. From a technical perspective, the stock has a gap back below $10 that could easily be filled if it doesn't hold $12.50. Investors should be keen to load up at those levels if the stock plunges.

One has to realize that once all these patent issues shake out that InvenSense has a promising technology that should be a huge success in the coming years. The patent issues are unlikely to impact the long term growth potential.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INVN over the next 72 hours. 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: Please consult your investment advisor before making any investment decisions.

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