Are Investors Ignoring InvenSense's Potential?

For investors, Wall Street's short-sighted nature can be a blessing in disguise. Motion chip specialist InvenSense (NYSE: INVN  ) was beaten down last week after the company missed earnings estimates for the fourth quarter as it decided to ramp up research and development initiatives. InvenSense reported earnings of just $0.07 per share, while analysts were expecting $0.10.

InvenSense is going all out to tap opportunities across several end-markets such as mobile and wearable devices. As such, the company increased R&D spending to bolster product development. However, analysts were not impressed, as they saw short-term gains instead of long-term prospects. Since InvenSense could be a key beneficiary of Google's (NASDAQ: GOOG  ) Project Ara, and it could land a spot in Apple's (NASDAQ: AAPL  ) iDevices, the recent drop has opened a window of opportunity for investors to buy more shares.

Ruling the Android universe
InvenSense is known for its motion-tracking sensors and has managed to create a solid position for itself in the Android universe. Samsung's (NASDAQOTH: SSNLF  ) Galaxy Note 3 and Galaxy S5, Google's Nexus 5, and Amazon's Kindle Fire all contain InvenSense chips.

Analysts at Baird are of the opinion that InvenSense is selling a larger number of gyroscopes to Samsung for the latest flagship than originally expected. Coupled with the fact that the Galaxy S5 is selling at a faster pace than its predecessor, there's is a good chance that InvenSense could see more orders from the South Korean giant going forward. Also, Samsung expects to sell approximately 126 million high-end phones this year. Since InvenSense's products are inside Samsung's high-end phones, the company's growth should pick up going forward.

Project Ara -- A big catalyst
The big news is Google's Project Ara. Google is working to create modular smartphones that will be designed exclusively according to customers' needs. This is a very ambitious project, as described on the Project Ara website:

The smartphone is one of the most empowering and intimate objects in our lives. Yet most of us have little say in how the device is made, what it does, and how it looks. And 5 billion of us don't have one. What if you could make thoughtful choices about exactly what your phone does, and use it as a creative canvas to tell your own story? Introducing Project Ara. Designed exclusively for 6 billion people.

Reports suggest that the Project Ara smartphones will cost just $50, and the technology giant will deploy kiosks for feature additions after the device is purchased. The modular smartphone will be 3D-printed, allowing for a high level of customization by users. Moreover, considering that low-cost phones are in great demand in emerging markets, this ambitious move by Google can improve growth in smartphones going forward.

InvenSense is deeply embedded in flagship Android devices. It has also partnered with Google on the Nexus platform, so it's likely that it could become a key partner in Project Ara.

Apple might be another reason to invest
There's been a lot of buzz on the Street that InvenSense is going to be a potential winner in the next iPhone. As reported by The Motley Fool's Adam Levy in March, it won't be a surprise if Apple switches suppliers and taps InvenSense for the accelerometer and the gyroscope. Levy goes on to state that Apple could place 90 million iPhone orders this year. Considering this huge number, Cupertino could diversify its suppliers in order to avoid supply constraints. 

On the other hand, there's the rumor of InvenSense supplying chips for an Apple smart watch. According to R. W. Baird, Apple could launch a smart watch in the second half of this year and ship between 5 million-6 million units. Since InvenSense is well-positioned in this market, it might land a spot in this device. In fact, InvenSense is already supplying chips for Samsung's wearables, such as the Gear 2 and the Gear Fit. 

Earlier this year, at the Mobile World Congress, InvenSense announced a seven-axis MEMS motion tracking platform. The ICM-20728, as the chip is known, has a three-axis gyroscope, three-axis accelerometer, and a pressure sensor on a single chip, along with a digital motion processor. This chip allows motion tracking with absolute and relative altitude changes for navigation, health, and fitness applications, as reported by SlashGear. According to InvenSense, this chip is the first of its kind, wherein all information is available on a single platform. 

This chip is intended for wearable devices such as smart watches and fitness bands. Additional features such as its self-calibrating nature and altimeter to enable indoor and outdoor 3-D navigation further strengthen InvenSense's chances of adding Apple to its client list. 

Final words
InvenSense has two big opportunities -- Google's Project Ara and Apple's next round of devices. The company did the right thing by investing in product development. Driven by a strong product portfolio and big clients, InvenSense can hit new highs going forward, so the stock's recent drop is an opportunity you shouldn't miss.

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  • Report this Comment On May 09, 2014, at 10:17 AM, garvco wrote:

    Now that Apple is looking at the Beats headphones....doesn't this bode well for wearables and InvenSense's technology?

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