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Shares of InvenSense (NYSE: INVN ) climbed Thursday on rumors that the MEMS maker has won the design in the Apple (NASDAQ: AAPL ) iPhone 6. This would be the third time in three generations of iPhones that Apple switched suppliers after the company tapped Bosch over STMicroelectronics (NYSE: STM ) for the accelerometer in the iPhone 5s (STMicroelectronics still won the gyroscope).
While it's still a rumor, InvenSense has long been expected to find its way into Apple's products. Regardless of whether the rumor proves true, InvenSense offers an excellent growth opportunity. On the company's third quarter conference call, CFO Alan Krock said (emphasis mine): "in our fiscal 2015, we are well positioned to enjoy a year-over-year rate of [revenue] growth similar to the past 2 fiscal periods of between 25% to 35%. This outlook opportunity excludes potential market share gains or losses."
If InvenSense does win the design in the iPhone 6, it could mean quite an increase in revenue for fiscal 2015.
The iPhone rumor ... again
Note, this isn't the first-time InvenSense was rumored to have won the iPhone design. Last May, Pacific Crest Securities analyst John Vinh released a note indicating his expectation that InvenSense would supply new iPhone models. Shares of InvenSense climbed nearly 5% that day.
Nonetheless, the rumor can't be ignored with a company the size of Apple at the helm. Digitimes reports Foxconn, Apple's manufacturing partner, is expecting to land orders of 90 million units for the iPhone six this year. Overall, the company expects Apple's smartphone shipments to rise 23% in 2014 compared to 13% last year.
To put that in perspective, Samsung shipped about 314 million smartphones last year. InvenSense claims that it took about 50% of Samsung's design wins -- about 157 million units. Additionally, Samsung accounts for about one-third of InvenSense's total revenue. So, if the iPhone rumors prove true, InvenSense could boost its revenue by another 20%.
The question is: how likely the rumors are true this time around? Considering, InvenSense's progress in the last year -- particularly in its ability to capture high-end Samsung devices -- I'd say the rumor is more likely than the last time around.
Which designs can InvenSense win?
Last year, Bosch took the accelerometer socket from STMicroelectronics but it held onto the gyroscope. Apple may try to cut down on costs and boost battery by transitioning to a 6-axis integrated gyroscope and accelerometer chip as many Android OEMs have done. All three manufacturers produce such chips.
If Apple does decide to transition, it's not clear that InvenSense has any advantage over the competition. With Android OEMs, InvenSense is able to win designs because its chips are tightly integrated with the Android OS. Its MPU-6515 is specially designed for Android KitKat and is essentially plug-and-play for OEMs.
Still, InvenSense is doing extremely well with its 6-axis sensors. Last quarter, 6-axis units accounted for 65% of shipments. That's up from less than 50% a year earlier. ST, comparatively, is less high on 6-axis sensors as it only mentions the chips once in its 10-K as a reference to its Samsung Galaxy S4 design win.
Barring the transition, InvenSense could take either the 3-axis gyroscope, 3-axis accelerometer, or both.
A loss of the gyroscope socket in the iPhone for STMicroelectronics could result in further revenue declines in 2014 for ST. The company was affected by losing the accelerometer, as revenue fell 4.8% in 2013. Analysts expect another slight decline in 2014 before the company returns to growth in 2015.
There's one additional socket that InvenSense could win on the iPhone -- an OIS gyroscope. The burgeoning technology is used to improve smartphone camera's by stabilizing the image using a gyroscope. Samsung neglected to use the technology in the Galaxy S5, but Apple may decide to integrate it into the iPhone 6. If it does, InvenSense is a clear choice.
Just a rumor, still a buy
Remember, this is just a rumor. If it were confirmed, InvenSense shares would be climbing much higher. InvenSense's leading edge position in motion sensing chips for smartphones and wearables makes it a great growth company. It should continue winning designs at Chinese OEMs, and expects to increase its share of Samsung design wins to 70% in the future.
If the company can leverage its fantastic performance, from Android devices to an iPhone design win, that's just icing on the cake.
InvenSense is a great pick, but it isn't our top stock
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