InvenSense (NYSE:INVN), the chipmaker best known for supplying motion sensors for iPhones and other devices, has shed nearly 70% of its market value since peaking at almost $26 in Aug. 2014. That decline can be attributed to troubling design losses to STMicroelectronics (NYSE:STM), slowing sales of smartphones worldwide, and the company's murky plans for the future.
I've discussed InvenSense's core problems in a previous article, but today I'll highlight three red flags indicating that the chipmaker might fare better under new management.
1. A CEO who overpromises and under-delivers
CEO Behrooz Abdi, who took over the top job in 2012, often tries to pin InvenSense's name to widely hyped markets. Last year, Abdi claimed that InvenSense held a 100% market share in smartwatch motion sensors. That statement led many investors to believe that InvenSense would supply sensors for the Apple Watch, since it already supplied motion sensors for iPhones.
As a result, many investors were stunned when InvenSense lost that socket to STMicro. That made InvenSense's socket in future iPhones look less secure, since STMicro also supplied Apple with iPhone motion sensors in the past. Samsung already dumped InvenSense and installed STMicro's six-axis sensor in its S7/S7 Edge earlier this year.
When Pokemon Go conquered the world earlier this year, Abdi declared that similar augmented reality (AR) games could expand the company's total addressable market for high-performance gyros in "mid-tier and low-tier smartphone markets." However, most modern smartphones already have adequate hardware to play simple AR games like Pokemon Go.
Abdi also claims that InvenSense's motion sensors will be used in higher-end VR headsets. Its sensors power HTC's Vive, but Facebook's Oculus Rift uses Bosch's sensors instead.
2. A poorly diversified business model
Abdi talks a lot about InvenSense diversifying into new markets like AR, VR, drones, and the Internet of Things (IoT). However, 46% of its revenue still came from Apple last quarter, up from 38% in the prior year quarter. Therefore, InvenSense's dependence on Apple is increasing as the iDevice maker's growth is peaking.
63% of InvenSense's revenue still came from smartphones and tablets last quarter, compared to 72% a year earlier. Optical image stabilization sensor revenue generated 12% of sales, compared to 16% a year earlier. The IoT unit's revenue share more than doubled to 25%.
That diversification is encouraging, but it isn't really reducing the company's dependence on Apple or boosting overall sales, which are expected to fall 24% this year. Moreover, larger rivals like STMicro and Bosch are expanding into the same markets on a superior scale -- which could apply additional pressure to InvenSense's margins. Therefore, InvenSense might benefit under a management team which is more keen on pursuing aggressive inorganic growth or setting itself up to be acquired.
3. A lack of insider confidence
Faced with these challenges, it isn't surprising that InvenSense's insiders lack much confidence in the company's future. Over the past six months, insiders sold over 130,000 shares without buying a single share.
Abdi sold $1.74 million in shares over the past two years, but didn't buy a single share on the open market. CFO Mark Dentinger, who didn't buy a single share over the past year, sold over $260,000 in shares during that period. That kind of insider selling didn't fuel much confidence in institutional investors, who sold 21 million shares last quarter.
The bottom line
I personally don't like to invest in small and poorly diversified supply chain players like InvenSense. The problem is simple -- InvenSense depends heavily on Apple and Samsung, but neither company is obligated to stick with InvenSense if bigger rivals like STMicro or Bosch offer comparable (or superior) sensors at lower prices.
Apple and Samsung's recent selection of STMicro's sensors over InvenSense bodes will for the struggling chipmaker. Unless InvenSense's management aggressively diversifies into defensible adjacent markets, I believe that the chipmaker could face much darker days ahead.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook 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.