InvenSense: Leading the Always-On Revolution to Profits

Already a leader in motion sensing and tracking technology used in smartphones and game consoles, InvenSense (NYSE: INVN  ) recently released some intriguing chips for the "always-on" revolution. The company has been a promising technology stock for a couple of years, based on speculation that it would add Apple to an already-strong customer base including Samsung (NASDAQOTH: SSNLF  ) , LG Electronics, and Nintendo, among others. The latest chip releases suggest InvenSense could leap into the wearable market and unleash years of growth without obtaining Apple as a customer.

The Consumer Electronics Show had a huge focus on the always-on concept and wearable technology, two areas on which the new chips released by InvenSense focus. One new chip is designed with automatic activity-recognition software that detects things like running, walking, biking, and sleeping, centralized in a wrist-worn wearable device. The goal of these chips is to attract the smart-watch, fitness-band, and fitness-watch applications -- or any new applications that want always-on sensing and tracking capabilities.

Wearable market forecast
Juniper forecasts that the wearable device market will explode to $19 billion by 2018, up from only $1.4 billion this year. Existing products range from the Fitbit and Jawbone in the fitness market to Samsung's Galaxy Gear and Google (NASDAQ: GOOGL  ) Glass. The latter two products both have sensors from InvenSense, already providing the company with a leadership position in wearable devices.

Business Insider has a graph showing the different forecasts for wearable devices, with an anticipated average of 100 million-200 million units of wearable products sold during 2016.

A forecast projects the Google Glass market has the potential to reach 21 million units annually by 2018, with the price tag dropping from $1,500 today to the $600 range in two years.

Tied into Samsung
Originally perceived as a secondary customer in the mobile market, the significant relationship with Samsung really benefits InvenSense in this move into the wearable sector. So far, Samsung has been more aggressive than Apple, considering the release of the Galaxy Gear smart watch. Since InvenSense is already designed into that product, it has a leg up on competing chip designers focused on other customers that have yet to launch in that category.

Samsung is currently a 30%-plus customer, providing a general indication of the potential value of a future deal with Apple.

Impact to InvenSense
For the fiscal year ended in March, InvenSense expects to top $250 million in revenue, with limited contributions from Gear or Glass products. The multi-billion-dollar revenue bases of Google and Samsung make these new products interesting, but the financial impact is relatively small. Google expects nearly $60 billion in revenue this year, with the above 21 million-unit forecast suggesting a wearable market of approximately $10 billion in five years, when Google could be generating $100 billion in annual revenue.

For InvenSense, a 100 million-unit market could add $100 million or more in revenue, with the company typically obtaining $1 of profit from each mobile device (possibly rising to $2-$3 in the near future, depending on the complexity of the chip utilized). The market share could be large, considering the company already counts Google and Samsung products in the customer list. The market could move the needle in a similar manner to finally sign Apple as a customer, where a 30% contribution, similar to Samsung's, would generate $75 million in annual revenue or more.

Bottom line
Considering InvenSense already counts two major wearable product developers as customers, the newly released always-on chips could help usher in new consumer products. Either way, InvenSense is the best way to play this revolutionary trend toward wearable smart devices. While the trend is difficult to predict, InvenSense appears to have the right products for this expanding area, providing it with a major catalyst for growth.

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