Shares of InvenSense (NYSE:INVN) shot up around 23% from the close on August 11 to close on August 15. Shares were spurred by a note from Pacific Crest analyst John Vinh upgrading the stock on the belief that the rise in popularity of Pokemon Go will spur sales of smartphones with high-end gyroscopes in them, like the ones InvenSense makes.
In fact, investors who were paying attention during InvenSense's earnings call could've gotten that news straight from the horse's mouth, so to speak. CEO Behrooz Abdi mentioned the opportunity presented by augmented reality apps and specifically brought up Pokemon Go. That was two weeks before the Pacific Crest note.
Here's exactly what Abdi had to say about Pokemon Go on InvenSense's first-quarter earnings call.
Pokemon Go is just an example
During his comments, Abdi told analysts "new applications prioritizing raw sensor performance" present a new growth opportunity for the company. It's not just augmented reality, but optical image stabilization and indoor navigation apps require high-end gyroscopes to function as well.
Of course, Abdi couldn't resist pointing to Pokemon Go as "a perfect example":
This game has achieved unprecedented viral popularity worldwide, but there have been numerous reported cases of the user experience varying widely depending on the presence of the high-performance gyroscope in the phone.
Ultimately, Abdi believes Pokemon Go will lead to "the emergence of many more augmented reality applications and games," which will enable it to get its products into more mid-tier and low-tier smartphones.
InvenSense has seen this opportunity for a long time
The ability to penetrate mid-tier and low-tier smartphones has been part of InvenSense's long-term outlook on the industry for a long time. Augmented and virtual reality implementations have been a big part of what was (and still is) expected to drive the penetration.
We didn't necessarily obviously forecast it or predict that something like Pokemon Go was going to come along, but we always felt that augmented reality was going to come along at some point. And obviously the last few weeks have been a frenzy of inbound interest from the customers. [...] If you have a phone that's even a mid-tier phone that's not AR compatible, I think you're going to get some questions from consumers. [...] Which means in that quarter or little bit later, we should see a really good traction in terms of designs.
In other words, Abdi expects that InvenSense will win more designs in the current or upcoming quarter for smartphone models that traditionally didn't have a high-end gyroscope. He expects the market to expand quickly, and by next year, a lot more phones could have InvenSense gyros inside.
Abdi has long pointed to the big opportunity in mobile. Back in 2014, he was talking about how only one in four mobile phones has a gyroscope in it, leaving it an opportunity to get its products into the remaining 1.5 billion phones in the world.
The competition is still looming
The biggest threat to InvenSense is the growing presence of STMicroelectronics (NYSE:STM) in the market. STMicro was able to grab the socket in Apple's (NASDAQ:AAPL) Apple Watch even though InvenSense managed to win the gyroscope in the iPhone 6, which was released just six months prior.
STMicro has been aggressively moving into InvenSense's turf, producing high-end six-axis sensors to take a larger share of Apple and Samsung's (NASDAQOTH: SSNLF) flagship devices. The competitor took both the optical image stabilization socket and the standard six-axis gyro socket in Samsung's Galaxy S7 and S7 Edge.
Samsung accounted for less than 10% of InvenSense's revenue during its fiscal first quarter. A year ago, it accounted for 23% of revenue. The shift caused Apple's share of InvenSense revenue to climb to 46% from 38% despite a significant decline in iPhone sales.
The point is, InvenSense hasn't done a great job of defending its market share, and there's no guarantee the expanding market will benefit InvenSense much. That's especially true considering the current strength of STMicro, as well as smaller manufacturers that may look to cater more toward the mid-tier to low-end price points necessary to penetrate the rest of the market.