Shares of InvenSense (INVN) dropped 25% after its second-quarter earnings report last October and have not yet recovered. The share price has remained mostly flat over the past six months, frustrating investors who have seen the company's revenue results skyrocket with the addition of Apple (AAPL 0.57%) as a customer.

In its most recent quarter, InvenSense beat analysts' estimates for revenue and met expectations on earnings per share. Despite the beat, shares fell after the report because of higher expectations following Apple's strong report and gross margins that remain depressed.

Nonetheless, there are several reasons to be optimistic about the future of InvenSense and its stock. Here are three reasons InvenSense stock could rise.


Source: InvenSense.

The growing Internet of Things
Growth in Internet of Things devices is booming. Research firm IDC sees the market reaching $7.1 trillion by 2020, growing at an annual rate of more than 21%. InvenSense -- which designs, develops, markets, and sells micro-electro-mechanical system (MEMS) gyroscopes for motion tracking devices in consumer electronics -- is in an excellent position to capitalize on that growth.

Management sees opportunities in the growing number of Internet-connected devices, including automobiles, drones, and pretty much anything else that measures motion or sound, like motion-controlled smart TV remotes.

Its new product family, Firefly, is built to take advantage of the growth in the Internet of Things. It integrates MEMS sensors with multi-core sensor processors and embedded core memory from ARM Holdings to make a sensor system on a chip. InvenSense also provides the software to make it all work, which it open-sources to manufacturers to tweak for their specific devices. It's the first company to provide such a platform, putting it at an advantage over competition to win designs with manufacturers looking to get to market quickly.

This new technology carries a higher-than-average margin for InvenSense and increases the amount of content per device. With the growth in IoT devices, InvenSense could diversify away from mobile devices, which accounted for 71% of revenue last quarter.

An increasing OIS attach rate
Management expects more tier-1 smartphone manufacturers to adopt optical image stabilization (OIS) in their devices. That's another market where InvenSense is well-positioned to capitalize on growth. InvenSense's imaging technology includes both the gyroscopes and software necessary to implement image stabilization quickly and easily.

While it might not be a problem for Apple to assign a team to write software for the iPhone's OIS system, smaller manufacturers with more diverse product lines may have more issues. InvenSense's solution is pretty much plug-and-play. As a result, the company's OIS revenue has climbed rapidly over the past year as the market adopts the technology, largely tapping InvenSense for its gyroscopes.

Last quarter, InvenSense reported that its OIS revenue accounted for 18% of its total, or nearly $18 million. Comparatively, the company brought in just $11.6 million in OIS-related revenue in the prior quarter and lumped OIS into its other category in the year-ago period (which produced just $7.1 million in revenue).

Growth in OIS attach rates and InvenSense's OIS business provides some relief from its depressed gross margin, since its chips carry a higher-than-average gross margin. Additionally, winning more content in a device makes InvenSense's other sensor chips stickier, helping ensure that it doesn't face market-share losses.

Growth in China and other customer diversification
Last quarter, Apple and Samsung accounted for 61% of InvenSense's total revenue. The previous quarter, the two mobile-device giants accounted for 69% of revenue. InvenSense provides its best pricing to its biggest customers; with the concentration of its revenue coming from these two companies, it's seen significant margin pressure -- which has caused its stock price to decline.

There are reasons to believe InvenSense will be able to diversify away from these two customers through design wins in the growing Chinese market and other manufacturers. InvenSense started specializing in value-added software, allowing mid-tier smartphone OEMs to differentiate their products and get to market quickly, ahead of tier-1 manufacturers.

It already has a strong position with Xiaomi, which quickly grew to become the third-largest smartphone OEM in the world and is expanding into other smart devices such as wearables. If it continues to grow faster than Apple and Samsung, it could provide some relief to InvenSense's gross margin. But the real relief will come from even smaller OEMs that try to capitalize on the growing markets in China, India, and Brazil.