Pacific Crest upped its price target on InvenSense (INVN) in a freshly published report, citing potential wins at Apple following a trip to Asia. In particular, the analyst believes that InvenSense has won the main gyroscope within the Apple (AAPL 0.34%) iPhone 6 and providing components to allow for optical image stabilization, and expects a win in the upcoming iWatch.
It could be true, but be careful
As noted in a prior piece, there is a lot of optimism surrounding InvenSense's potential involvement in the iPhone 6. As was the case with prior iPhone launches, that analysts are all singing in unison that InvenSense will power the iPhone 6 in some fashion.
However, it's also important to take these rumors – remember, they are rumors, after all – with a grain of salt. For example, the Pacific Crest analyst specifically points to optical image stabilization as being a part of the 4.7-inch iPhone 6, but other rumors suggest that only the larger, more expensive iPhone 6 variant will come with this feature.
Unfortunately, until the teardowns are in, all we have is -- at best -- intelligent speculation.
What if all of these rumors are true?
Let's suppose for a moment that all of these rumors are true -- that InvenSense is meaningfully inside the iPhone 6 and that it is also a big part of the upcoming iWatch. How will this ultimately impact the stock?
Well, right now the current analyst earnings consensus sits at $0.71/share for the current year and $0.96/share for the coming fiscal year (ending in March 2015 and 2016, respectively). These earnings estimates are predicated on 28.60% revenue growth for fiscal year 2015 and then an additional 21% in fiscal year 2016.
If these estimates do bake in material Apple content gain, then the shares don't really look all that cheap, as they already trade for about 25 times non-GAAP projected fiscal 2016 earnings (though for "hotter" tech stocks, sentiment and general business direction are more important than traditional valuation metrics). Further, if there is an Apple ramp built in but it's a no-show, then the stock could be vulnerable. However, if there isn't a material Apple ramp baked in here, then these estimates could prove too low, potentially sending the stock surging on a series of quarterly beats.
Foolish bottom line
It's an exciting time for InvenSense investors, particularly those who bought on the earnings dip. Taking a long-term view, it's clear that the growth in smartphones and the potential growth in wearable computing devices could be strong long-term revenue/earnings drivers.
However, rational or not, the performance of the stock exiting 2014 will probably be pretty heavily Apple-driven. If it wins the iPhone/iWatch sockets as expected and Apple has a series of blowout quarters, then InvenSense should power higher. If InvenSense doesn't win Apple, then it gets a bit trickier to call, but it would seem likely that the stock would drop rather significantly in that case.
