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Numerous Positive Catalysts Make InvenSense a Great Buy

July 17, 2014 | About:
sandyinvestment

sandyinvestment

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Shares of chipmaker InvenSense (INVN) have gained momentum in the last one month, putting up a strong gain of 16%. As the company is slated to benefit from growth in wearable devices, such as Apple's (AAPL) smartwatch, and the growing application of motion tracking technologies in smartphones, it won't be surprising if it is able to continue its terrific run going forward. Let's take a closer look at the reasons why InvenSense deserves a place in your portfolio.

Solid customers and prospects

LG, Xiaomi, and Samsung (SSNLF) account for 40% of InvenSense's total revenue, driven by the company's solid product development over the years. Samsung is its chief customer, accounting for a large part of the total revenue. InvenSense is supplying its motion-tracking chips to Samsung for its Galaxy S5, which has been a huge hit, breaking the first day sales records of the Galaxy S4. Samsung launched the device in 125 countries, henceforth providing a large market for InvenSense to tap.

InvenSense has also initiated volume shipments of flagship customer products such as Samsung's Galaxy S5 and wearable devices such as the Samsung Gear 2 and Gear Fit. InvenSense's 6-axis product family, including the MPU-6500 and 6515 Android-compatible products, comprised more than 70% of the shipments last quarter, which helped the company improve its gross margin.

InvenSense is also growing its market in China. The vast smartphone market in China gives InvenSense a large opportunity to tap. The company's six-axis motion-tracking solutions and two-axis optical image stabilization products are performing well in the country, and could lead to stronger growth going forward.

Focus on product development

Its product innovation is also strong. InvenSense recently also introduced the first integrated 7-axis all-in-one device with gyro, accelerometer, and pressure sensor in a silicon die. It has also introduced a reference design, with automatic activity recognition, software library, and low-power wireless connectivity.

The company is already receiving strong interest for this product from its customers who are interested in collecting, tracking, and monetizing activity data. It has launched some microphone products as well, such as an ultra-low-power, always-on microphone, a 70 db microphone, and a top-port microphone for smartphone.

Moreover, InvenSense is going to benefit from Google's (GOOG) Project Ara, under which it is working on creating modular smartphones that will be exclusively designed and customized according to the user's needs. These smartphones will cost just $50 and will be developed by 3D-printing technology, which will give users strong flexibility to customize their handsets.

The Apple angle

It's also probable that InvenSense will supply chips for an Apple smart watch. The company has developed a chip that features a self-calibrating module and an altimeter to enable 3-D navigation. This might increase InvenSense's chances of landing a design win at Apple.

Currently, InvenSense derives nearly 30% of its revenue from Samsung. While a lot of business from Samsung isn't a bad thing, it is necessary for InvenSense to diversify its revenue streams in order to stabilize its business. As of now, Apple is rumored to be one of the potential new customers.

Pacific Crest recently said that InvenSense has landed a spot in Apple's upcoming iPhone 6 and the rumored iWatch. Pacific Crest analyst John Vihn said, "InvenSense remains extremely well-positioned to penetrate Apple this year." Vihn is confident because InvenSense announced that it is increasing its capacity from 400 million units to 1 billion units.

Although InvenSense hasn't officially announced that it will provide parts for Apple, it looks likely and could well prove to be a game changer for the company. The iPhone 6's sales are expected to jump 20% because of the larger screen, whilst the iWatch is expected to rake in $17.5 billion in annual sales. Also, Needham recently revised its price target for InvenSense upwards to $22. Needham said:

"With a reset on a too-optimistic consensus forecast while heading into the favorable Q/Q comp driven mid-year, we think the risk posed by the inventory build is certainly worth the reward if INVN ships to the order forecasts it claims to have from Samsung, LG and the other Android players. Furthermore, we see upside potential in the microphone business, OIS (which we believe is now discounted in the story) and of course, Apple, which remains elusive."

Conclusion

InvenSense has gained strong momentum of late and it is highly likely that it will be able to continue its outstanding performance going forward. A probable win at Apple will surely boost the company's prospects, and will help it a lot in achieving the expected earnings CAGR of 22.40% for the next five years. So, investors should definitely consider InvenSense for their portfolio.


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