Why InvenSense Inc. Still Looks Good After Weak Earnings

InvenSense's long-term opportunties overshadowed its near-term weakness on Thursday.

Jan 31, 2014 at 11:00AM

InvenSense (NYSE:INVN) reported its third-quarter earnings earlier this week, missing consensus estimates on the top and bottom lines. A weak outlook for the company's fourth quarter had analysts selling shares, driving the stock down over 7% at one point, in after-market trading.

The company is winning market share at Samsung (NASDAQOTH:SSNLF) over its largest competitor STMicroelectronics (NYSE:STM), and the Korean-electronics maker accounts for about one-third of InvenSense's revenue. Weakness at Samsung, or any one of its biggest customers, could negatively impact InvenSense quarter-to-quarter, but its earnings report should give long-term investors confidence.

But first, the bad parts
I'd be remiss if I ignored a few details from InvenSense's earnings report that caused analysts to sell the stock after hours on Wednesday.

Not only did the company miss consensus estimates for non-GAAP EPS, it missed its own guidance from the second quarter of $0.16 to $0.18 per share. Moreover, it completely missed its forecast for GAAP EPS of $0.10 to $0.11 when it reported breakeven profits. Increased operating expenses as the company increased its inventory and ongoing litigation expenses with STMicroelectronics -- which were higher than anticipated -- led to the lack of profits.

STMicroelectronics patent portfolio of over 900 MEMS-related patents is one of the company's biggest strengths, so it aggressively defends those patents. Legal fees related to litigation rose to $3.5 million last quarter for InvenSense, and the company expects fees to be between $3 million and $5 million in the current quarter.

Additionally, the company's gross margin remains relatively low at 51%. It was 54% in the year-ago period. The company expects long-term, gross margin to climb to the mid-50% range as customers transition to its newest products. Its biggest customers, however, get the best pricing, and with Samsung climbing to one-third of sales in recent quarters, it has weighed on InvenSense's gross margin.

Going forward, the company expects revenue of $55 million to $58 million in the fourth quarter, below analyst's expectations of $62.8 million. Meanwhile, analysts were expecting non-GAAP EPS of $0.15, significantly higher than management's guidance of $0.09 to $0.11. Gross margin should be in-line with its previous quarter, but still below its long-term target.

The long-term outlook is strong
Despite the company's short-term struggles and weak outlook for the upcoming quarter, it relayed a very positive outlook for fiscal 2015 beginning in April. The company expects growth of 25% to 35% on its top line. Analysts had been expecting growth to fall below 23%. In the first nine months of fiscal 2014, the company has increased revenue 26%, but that's expected to come down based on its fourth quarter outlook.

Long-term growth should be bolstered by an increased share in Samsung design wins. The company has grown its share at the largest smartphone manufacturer from 30% to greater than 50% in the last 7 quarters. It's taking share from STMicroelectronics. With the upcoming release of the Galaxy S5, InvenSense should see Samsung continue to drive revenue growth within the company, but it will put pressure on its gross margin.

Another surprise from the company's earnings report was the disclosure of Xiaomi as it contributed 16% of revenue in the third quarter. Xiaomi has been tremendously successful in its home country, China, where it outsold Samsung (and everyone else) in December. The company has plans to expand its operation to more developing countries, which means further opportunity for InvenSense as it ties itself to another growing company.

InvenSense sees China as a big opportunity going forward, and believes its possible other Chinese manufacturers could cross the threshold to become disclosable (10% of revenue).

Additionally, the company's OIS technology continues to be an opportunity for growth, but it should begin feeling pricing pressure from STMicroelectronics as the competitor has caught up with a good-enough design and better pricing. This isn't anything new for InvenSense, and it should deal with the pricing pressure just fine as it targets high-end customers and wearables.

Buying or selling?
Post-earnings, InvenSense's stock price has been all over the map as short-term sellers sent shares to long-term investors. By the close on Thursday shares had climbed over 4% from Wednesday's close, and 12% from the bottom of Wednesday's after-market trading. The long-term outlook for InvenSense should encourage Foolish investors to buy into the stock despite some near-term uncertainty and volatility.

More compelling ideas from The Motley Fool
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multi-billion dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they’ve done it again with three stock picks that they believe could generate the same type of phenomenal returns. They’ve revealed these picks in a new free report that you can download instantly by clicking here now.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends InvenSense. The Motley Fool owns shares of InvenSense. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers