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The technology companies operate in a fast moving and rapidly evolving business environment. The fast pace of technology evolution is constantly forcing established players out and rewarding newcomers with strong research and devopment. So naturally this environment rewards players which have diversified revenue streams and a very strong R&D.
InvenSense (NYSE: INVN ) has shown consistent growth since its inception, and particularly since going public in 2011. The company stands out due to its stable earnings and diversified technology customer base. This stability stems from its large target market and a competitive advantage built upon unique technology solutions. This target market ranges from smartphones to smart televisions, navigation devices and gaming consoles and any other such equipment that involves motion tracking.
The company is a pioneer as well as a market leader in the MEMS industry. However, in order to retain its advantage in the future, InvenSense needs to keep investing in R&D and insight into the ever changing dynamics of the semiconductor industry, not to forget knowing its competition.
Short Term Catalyst
There were expectations in the market that InvenSense might become a supplier for Apple's (NASDAQ: AAPL ) newest line of products. It was widely rumored that InvenSense's motion sensors might end up in the iPhone 5s. However, contrary to street expectations a strip down of the latest iPhone showed no signs of InvenSense hardware. This was the primary reason behind the decline of shares in 3rd week of September.
While this has been a short term catalyst for the company, the real concern for investors should be the ability of InvenSense to create value for long-term shareholders. To achieve this goal it will need to maintain its high growth rates in the year to come. This is only possible through continuous R&D in this highly competitive industry.
Financials over the years
InvenSense revenues have grown by a healthy 116% over the past two years, and the company management believes that it is bound to grow further in the future. Not only has its revenues been growing, its gross profit as well as operating income has grown by 109% and 163% respectively since 2011. Cash from operations have also grown from $7.9 million in 2011 to $35 million in 2013 at a rate of 343% over the last two years .
The industry requires market winners to invest continually and effectively in research and development. InvenSense has 118 employees involved in research and development, and its research and development costs have grown from $15.8 million (2011) to $24.6 million (2013). The given figures show that InvenSense's investment in research and development has grown over the years, which could be of immense benefit to the company in the future.
The semiconductor industry follows a cyclical behavior in terms of demand, revenues, and profitability, which translates into the company's stock price. As already discussed, InvenSense's customer base is diversified, and crests and troughs in the demand of a single commodity would affect InvenSense's profitability to a lesser extent as compared to other companies that concentrate on a single market.
InvenSense's revenues generated from the smartphone and tablet market have increased from 8% of total revenues in 2011 to 71% in 2013, while revenue generated from the gaming industry has fallen from the 80% of total revenues in 2011 to 19% in 2013. Even though InvenSense's revenue has become more smartphone industry intensive instead of the gaming industry intensive, the shift has not negatively affected the company's revenue generation, which can be attributed to the widely diversified customer base. The customer base of InvenSense is smaller but more diversified as compared to competitors such as Skyworks.
For the coming 4-5 years, InvenSense can immensely benefit from the growing smartphone and tablet industry. Moreover, as trends in consumer behavior show, consumers are becoming more and more inclined toward products that respond to gestures, and products that read the activities of the consumer and respond accordingly. This trend is bound to extend boundaries for InvenSense's gyroscopes and related products that are employed in smart televisions, gaming consoles, smartphones, tablets, cameras, as well as other motion tracking devices used in the fitness industry.
What makes a security a good investment for the long run is its underlying profitability and the measures that the company takes in order to ensure healthy growth over the years. InvenSense is focused on driving growth from smartphones and employing a lot of capital into R&D.
These measures should ensure stability as well as long term growth and profitability, even though it is still in infancy as compared to its competition in the industry. Looking at the company's numbers and business model, InvenSense seems to know its business and is set to continue current growth trends.
Profit from destruction
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