Motion tracking technologies provider InvenSense (INVN) has gained robustly in the last one year on account of its impressive results and the rumor that it could become an Apple (AAPL) supplier going forward. However, the company’s fiscal fourth-quarter results led to decline in InvenSense shares by 6% as it missed earnings estimates. But let’s see whether this is a buying opportunity for investors? Or should investors stay away from InvenSense.
A Weak Beginning
The trailing P/E ratio of 280 indicates that InvenSense is extremely expensive. So, when the company recorded just 7% year over year increase in revenue and its earnings of $0.07 per share missed the consensus estimate of $0.10, investors were unhappy. InvenSense failed to deliver on the extremely high expectations from the stock which is trading at such expensive levels.
Further, the guidance for InvenSense was also weak. The company expects revenue in the range of $63 million and $66 million in the first quarter, but this is lower than the consensus estimate of $69 million. This gives the reason why InvenSense shares dropped.
However, the company is confident on its execution and strategies. Management reported that InvenSense gained huge market share in the markets it serves. In addition, the company witnessed steady increase in attach rates of gyroscopes in a wide variety of applications. Going forward, the company has an impressive product roadmap that includes a new generation of always-on, context-aware devices and applications.
InvenSense is looking to tap the growing market for the Internet of Things and wearable devices with its solutions. InvenSense is targeting on innovations in hardware and software to deliver low-power systems with an increase in performance, along with shorter time to market for customers.
The product development by the company in the mobile segment has helped it gain adoption across several customers. The company has some very popular customers such as LG, Xiaomi, and Samsung. These three customers are expected to account for 40% or more of InvenSense's revenue altogether, with Samsung contributing about mid-30% of the top line and being the major contributor.
Samsung’s Galaxy S5 contains motion tracking chips from InvenSense. Samsung's new smartphone has broke the launch day sales record of its predecessor Galaxy S4 by over 30%. Samsung launched the device in 125 countries, so InvenSense has huge market to capture if sales of the latest Samsung flagship continue at this pace.
The 6-axis family products of InvenSense including the MPU-6500 and 6515 Android-compatible chips, have gained good traction. Samsung's Galaxy S5 and wearable devices such as the Samsung Gear 2 and Gear Fit are being shipped by them currently. The product family has drove about 70% of InvenSense's shipments in the last quarter.
InvenSense is also serious on China. The 6-axis MotionTracking solutions and 2-axis optical image stabilization products are experiencing grater demand in the country. There has been an increase in gyro attach rates in mid- and high-end smartphones such as Xiaomi and Oppo. The smartphone market in China is a huge opportunity for InvenSense since the roll out of LTE in the nation could lead to upgrades from older generation phones to new generation devices.
An Enticing Proposition
There might be a probability that InvenSense could provide chips to Apple for the upcoming iPhone 6. In addition, there's is a probability that InvenSense could provide optical image stabilization, or OIS, technology to Apple for the next iPhone.
InvenSense shares could reach to new highs on account of tremendous revenue and earnings growth that is expected to come with having Apple as a client.
InvenSense shares declined owing to weak results. Moreover, the company is quite expensive considering its valuation. But InvenSense has a forward P/E ratio of just 20 that indicates good growth in earnings in the future. Going forward, the company's tie-up with Samsung and a probable customer win at Apple could lead to exciting financial results for InvenSense. Therefore, investors should consider the stock and give it space in their portfolio.