Wearable Computing: These 2 Small-Cap Tech Stocks Are Poised for Growth

Ambarella (NASDAQ: AMBA  ) and InvenSense (NYSE: INVN  ) are two companies that have been in the news for different reasons of late. But the common denominator among the two companies is that both of them are well positioned to benefit from growth in wearable devices, a market that's expected to be worth as much as $12 billion in the coming years, according to Business Insider. So it makes sense to take a close look at the performance of both companies and see how they're positioned for long-term growth.

Ambarella's solid prospects
Ambarella is seeing solid growth in revenue. Its top line was up 26.8% in the last reported quarter and the company is working on different strategies to gain market share in the future. Driven by strong demand for its IP cameras, Ambarella looks well-poised for growth in the long haul.

With the shift of analog CCTV cameras to high-definition IP cameras, Ambarella's IP cameras are in good demand. Their attractive features -- such as high-quality, high-definition capabilities with excellent low-light capabilities, highly efficient encoding, and very low power consumption -- have clicked with customers. Moreover, Ambarella is witnessing strong demand for its cameras in China, led by key customers such as Hikvision and Dahua. 

Ambarella's Wi-Fi IP cameras for home security are also gaining traction. The introduction of new cameras with high-definition capabilities from traditional home-security companies and others is driving demand in this segment.

The company is also enjoying strong sales of sports cameras. Further, with many new products in the pipeline, along with GoPro's HERO3+ Silver and Black camera editions, Ambarella looks well positioned for growth. Also, Ambarella is working on wearable camera solutions for social and vertical market applications. It has successfully demonstrated its wearable camera reference for the Google Helpout app.

There's good response from the automotive market, too, especially in regions such as Russia, China, Taiwan, and South Korea. China remains one of Ambarella's prime markets. Though the Chinese market is still driven by demand for low-cost products, but with the transition to high definition, Ambarella's prospects in China appear strong.

Ambarella is also working on 14- and 16-nanometer process nodes to make its chips more efficient and keep their prices low.

So Ambarella has concrete catalysts in store that are expected to drive its business higher in the future. Even analysts expect the company to post solid earnings growth in the future. Next year, Ambarella's earnings are expected to grow a whopping 26.5%. In addition, Ambarella's trailing P/E of 31 is expected to come down to just 18 on a forward P/E basis, suggesting solid earnings growth.

Driven by the adoption of its solutions across different end markets, especially wearables, Ambarella looks like a good long-term bet.

InvenSense: Another chipmaker worth contemplating
On the other hand, chipmaker InvenSense is riding the wave of smartphone and tablet sales, driven by sales of its motion-tracking sensors. In addition, InvenSense shares have gained as a result of rumors that it could be a supplier to Apple for the coming iPhone.

InvenSense has been doing well as a result of top mobile customers on its client list. Its strategy of providing customers with a true plug-and-play motion tracking solution, including value-added MotionApps software, has resulted in several customer design wins.

InvenSense is seeing strong sales of its 6-axis MotionTracking solutions and its 2-axis optical image stabilization products as a result of growth in Chinese smartphones such as Xiaomi and Oppo. Also, InvenSense's sensors are present in popular devices such as Samsung's Galaxy Note 3, Google's Nexus 5, and Amazon.com's Kindle Fire. These devices carry InvenSense's 6-axis MotionTracking devices and 2-axis gyros, cementing the fact that the company's sensors are cutting-edge. 

The chipmaker's 6-axis MotionTracking product, the MPU-6500, is also gaining market share, according to management. Also, since the product is optimized for Android's KitKat OS, it should gain further ground as more manufacturers roll out the latest Android devices. In addition, InvenSense's second-generation Digital Motion Processor hardware accelerator that's equipped with algorithms for low-power system operations provides the first AlwaysOn motion-tracking experience on the market. These features are expected to bring in more customers for the company. 

InvenSense is also making good progress in wearable devices such as health and fitness tracking, smartwatches, wearable computing, and immersive gaming. As I mentioned earlier, analysts expect the wearable-device industry to grow at a good pace in the future, giving InvenSense space to grow. It's also rumored that Apple's iWatch will come with many health-related features, which is why there's more speculation that Apple will use InvenSense's chips.

Moreover, the acquisition of Analog Devices' MEMS microphones business is expected to gove InvenSense more exposure in the audio market. Driven by all such positives, analysts are quite hopeful of a solid performance from InvenSense in the future. The company's earnings are expected to grow at a solid 21.67% annual rate over the next five years, which makes it a good buy at under 29 times forward earnings.

Takeaway
Both Ambarella and InvenSense are seeing good demand in their end markets. Both companies are coming up with new and innovative products, while a big opportunity in the market for wearables makes them solid picks for the long run.

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11/26/2014 3:59 PM
AMBA $54.85 Up +3.66 +7.15%
Ambarella CAPS Rating: *****
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InvenSense CAPS Rating: *****

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