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Buy InvenSense For Its Future Opportunities and Reasonable Valuation

Riddhi Kharkia

Riddhi Kharkia

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For investors, Wall Street's short-sighted nature can be a blessing in disguise. Motion chip specialist InvenSense (INVN) has been having a volatile run on the Street after the company missed earnings estimates for the fourth quarter as it decided to ramp up research and development initiatives. InvenSense reported earnings of just $0.07 per share, while analysts were expecting $0.10.

Company Background

Let me take a minute here to tell you more about InvenSense. The company is a producer of MotionTracking (company trademarked) products that are used in consumer electronic devices such as smartphones, tablets, wearables, gaming devices etc. The motion sensors are becoming a sensation among users of these devices as it provides an intuitive way to users for communicating seamlessly with the device. The primary function of these sensors is to translate the motions of the users in free space to executable input commands. Samsung (SSNLF) represents one of InvenSense’s biggest clients with its technology being used in Samsung’s flagship products like Galaxy S5, Gear 2 and Gear Fit.

After the results

InvenSense is going all out to tap opportunities across several end-markets such as mobile and wearable devices. As such, the company increased R&D spending to bolster product development. However, analysts were not impressed, as they saw short-term gains instead of long-term prospects. Since InvenSense could be a key beneficiary of Google's (GOOG) (GOOGL) Project Ara, and it could land a spot in Apple’s (AAPL) smart devices, the recent drop has opened a window of opportunity for investors to buy more shares.

Android markets under its command

InvenSense is known for its motion-tracking sensors and has managed to create a solid position for itself in the Android universe. Samsung’s Galaxy Note 3 and Galaxy S5, Google's Nexus 5, and Amazon's Kindle Fire all contain InvenSense chips.

Analysts at Baird are of the opinion that InvenSense is selling a larger number of gyroscopes to Samsung for the latest flagship than originally expected. Coupled with the fact that the Galaxy S5 is selling at a faster pace than its predecessor, there's is a good chance that InvenSense could see more orders from the South Korean giant going forward. Also, Samsung expects to sell approximately 126 million high-end phones this year. Since InvenSense's products are inside Samsung's high-end phones, the company's growth should pick up going forward.

Project Ara is going to be big for InvenSense

Reports suggest that the Project Ara smartphones will cost just $50, and the technology giant will deploy kiosks for feature additions after the device is purchased. The modular smartphone will be 3D-printed, allowing for a high level of customization by users. Moreover, considering that low-cost phones are in great demand in emerging markets, this ambitious move by Google can improve growth in smartphones going forward.

InvenSense is deeply embedded in flagship Android devices. It has also partnered with Google on the Nexus platform, so it's likely that it could become a key partner in Project Ara.

A game-changing product

Earlier this year, at the Mobile World Congress, InvenSense announced a seven-axis MEMS motion tracking platform. The ICM-20728, as the chip is known, has a three-axis gyroscope, three-axis accelerometer, and a pressure sensor on a single chip, along with a digital motion processor. This chip allows motion tracking with absolute and relative altitude changes for navigation, health, and fitness applications, as reported by SlashGear. According to InvenSense, this chip is the first of its kind, wherein all information is available on a single platform.

This chip is intended for wearable devices such as smart watches and fitness bands. Additional features such as its self-calibrating nature and altimeter to enable indoor and outdoor 3-D navigation further strengthen InvenSense's chances of adding Apple to its client list.

Final words

InvenSense has two big opportunities -- Google's Project Ara and Apple's next round of devices. The company did the right thing by investing in product development. Driven by a strong product portfolio and big clients, InvenSense can hit new highs going forward, so the stock's current valuation presents an attractive entry point to investors

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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