Much of the talk surrounding wearable technology revolves around Samsung (NASDAQOTH:SSNLF), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and other companies that actually make the devices, as well as increasing rumors about Apple entering the market.
But looking beneath the surface can often be the best way to understand a market segment, and it can also be where the biggest investor opportunities are hiding. That's why InvenSense (NYSE:INVN) is such an interesting company right now, because its technology sits in some of the most popular devices on the market, and its potential in the wearables market is huge.
What exactly does InvenSense do?
InvenSense designs and sells micro electro mechanical system (MEMS) gyroscopes for motion tracking. That doesn't make a whole lot of sense to some people, so let's put this into context.
Gyroscopes are basically just small sensors that know when they're being moved, and in which direction they're moving. Nintendo put InvenSense's gyroscopes into its Wii console, so users could play interactive, motion-sensing games such as bowling and golfing.
The company's sensors are found beyond gaming consoles. Samsung tapped InvenSense for its flagship Galaxy S5 smartphone, and it also uses the company's sensors in its new Gear 2 and Gear Fit smartwatches.
Google employs the InvenSense's nine-axis MPU-9150 motion sensor in its Google Glass wearable tech. Glass isn't really a mass market wearable yet, though Google did just open up sales of the device to all U.S. residents. But the incorporation of InvenSense's inertial sensor in such a cutting-edge wearable device clearly shows the company's potential.
However, great potential is only part of analyzing a company, so let's take a quick look at the financials to see how the company's doing.
How the company looks right now
The company released its 2014 fiscal fourth-quarter results earlier this month, and things weren't so great:
- Revenue increased 7% year over year, from $55.2 million to $59 million. Not all that impressive considering the company is trading at P/E of almost 140 (based on normalized EPS)
- Net loss was $5.6 million, compared to net income of $13.6 million, year over year.
- Diluted earnings per share were negative $0.06, compared to $0.15 for the fourth quarter of 2013
Though it's good to take the long view on stocks, these numbers scared off investors and pushed shares down about 7% since the earnings report.
So is InvenSense doomed? Probably not.
For one, the company increased both selling, general, and administrative and research and development costs this past quarter in an effort to add new customers and develop new products. Research and development spending alone increased from less than $25 milion in fiscal 2013 to $48 million in fiscal 2014. Here's what InvenSense President and CEO Behrooz Abdi had to say about the R&D spending:
This is now enabling us to make sizable market share gains in our core mobile market and to open up exciting business opportunities in emerging applications, such as wearables. To support our expected strong growth in fiscal 2015, we made a strategic decision in both fiscal Q3 and Q4 to build inventory in our core products. This positions us to increase our capacity in a more linear fashion at optimum cost, while we prepare for multiple significant customer ramps in the coming quarters.
This strongly hints that the increase in spending has resulted in new customers, which is obviously great. The company needs to move away from its reliance on Samsung, which accounted for about 47% of its revenue in the fourth quarter. While getting a lot of business from Samsung is a good thing, InvenSense could stabilize some of its revenue streams by diversifying its customers.
Apple is rumored to be one of those potential new customers, but nothing definitive is known yet. The earliest word on this would likely be after a new iPhone launches this fall, or if Apple decides to throw its hat into the wearables ring with a possible iWatch later this year.
Final Foolish thoughts
It's hard not to see the potential for InvenSense in the wearables market. These devices will rely heavily on motion sensing and positioning, along with using the tech in entirely new ways. The company is already making sensors for some of the best smartphones and latest wearables on the market, and building those relationships now may pay off big later.
One thing to watch would be if the company has too many sequential quarters in which revenue does not increase substantially, considering that the stock is trading so high compared to earnings. All the R&D spending and reliance on Samsung will likely hurt the company's guidance for the current quarter, but that could be offset in the near future as InvenSense adds new customers.
It's hard not to want to see the company score an Apple device, considering the millions of mobile units the iMaker sells every year. But as long as the company is gaining new customers in both smartphones and wearable devices, I don't think it's detrimental that Invenense doesn't have Apple, at least right now.
Digging deeper into InvenSense
While the wearable market is still in its infancy, InvenSense is a market leader in motion-tracking components -- and that could bring huge payoffs down the road. That's exactly why The Motley Fool's put together a special report on InvenSense, which you can access now for free. ABI Research said the wearables market could see 485 million device shipments annually by 2018, leaving any market leaders in the wearables space ina very good position to profit. To get access to the free report, just click here now.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (C shares), and InvenSense. The Motley Fool owns shares of Apple, Google (C shares), and 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.