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3 Reasons InvenSense, Inc. Stock Could Rise

By Leo Sun – Updated Apr 5, 2018 at 3:52AM

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A few near-term tailwinds might lift InvenSense, but do the risks outweigh the rewards?

InvenSense (INVN), the chipmaker best known for supplying motion sensors for Apple's (NASDAQ: AAPL) iPhones and other devices, has had a wild year. The stock had fallen about 30% for the year at the beginning of December due to its slowing sales growth and competition from bigger rivals like STMicroelectronics (STM 1.85%) and Bosch Sensortech.

But then InvenSense abruptly rallied nearly 30% on Dec. 9 after Reuters reported that Japanese electronics maker TDK had offered to acquire it for $12 per share. Following that pop, InvenSense stock is now up 6% for the year, but remains almost 60% below its peak of $26 in 2014.

Should investors hold on and expect the stock to rise further, or has the TDK report given long-suffering investors the best chance to cut their losses? Let's take a look at three tailwinds for InvenSense and whether they're actually good reasons to buy the stock.

Image source: InvenSense.

1. A potential bidding war

InvenSense posted double-digit year-over-year revenue declines over the past two quarters, and analysts expect its sales to fall 30% for the full year. Most of that decline was caused by a global slowdown in smartphone and tablet sales, its overwhelming dependence on Apple's orders (53% of its revenue in the first half of fiscal 2017), and competition from rival sensor makers like STMicro. Its bottom line also dipped into the red over the past three quarters due to rising operating expenses.

Faced with those bleak numbers, the best-case scenario for InvenSense would be to sell itself before its market value declines even further. Back in October, Reuters reported that InvenSense was exploring strategic initiatives "including a possible sale," although no potential suitors were named.Then on Dec. 9 came the Reuters report that "people familiar with the matter" were saying TDK was in talks to acquire Invensense.

In a previous article, I noted that STMicro, Sony (NYSE: SNE), and Intel (NASDAQ: INTC) could all benefit from buying InvenSense, which has a pretty low enterprise value of $900 million. If any of those companies step up to challenge TDK's rumored bid, a bidding war could give InvenSense's stock price a big boost. Though it isn't smart to invest in a stock based on the possibility of a bidding war.

2. Virtual and augmented reality

Sixty-eight percent of InvenSense's revenue came from smartphones and tablets in the first half of the year. Revenues from that segment fell 35% annually during that period. To diversify away from that saturated market, InvenSense is expanding into virtual reality and augmented reality devices.

Its motion sensors already power HTC's Vive VR headset, which could encourage other new headset vendors to use its gyroscopes and accelerometers. Piper Jaffray claims that 500 million VR headsets could be sold by 2025 -- indicating that it could become a growing adjacent market for InvenSense. CEO Behrooz Abdi has also claimed that a new generation of AR games like Pokemon Go could broaden its total addressable market for high-performance motion sensors in "mid-tier and low-tier smartphone markets."

Those new growth markets sound promising, but investors should note that InvenSense isn't the only motion sensor maker targeting these markets. Bosch already provides motion sensors in the Oculus Rift, and STMicro's motion sensors are found in plenty of smartphones and tablets.

3. The Internet of Things

In my opinion, a better growth opportunity for InvenSense would be the growing Internet of Things (IoT) market, which consists of wearables, home automation devices, connected cars, drones, and other gadgets. Intel estimates that the number of connected devices worldwide could surge from 15 billion in 2015 to 200 billion by 2020.

InvenSense has been expanding into the IoT market with motion sensors for drones and connected cars via dash cams, smart mirrors, and collision avoidance systems. Revenue from InvenSense's "IoT and other" unit fell 6% annually and accounted for 23% of its top line during the first half of the year.

That growth looks poor, but it's faring much better than its core smartphone and tablets business. Therefore, if InvenSense invests more heavily in its IoT business, the unit could grow again and offset its weaknesses in the mobile market.

But do those potential tailwinds make InvenSense stock worth buying?

Buyout buzz and expansion into new markets might boost investor interest in InvenSense, but I still don't think the stock is a worthy investment. The stock could quickly collapse if TDK walks away from the rumored talks, Apple splits its motion sensor orders with a rival chipmaker, or STMicro and Bosch leverage their scale to undercut InvenSense's prices. I believe that those risks still make InvenSense a poor investment for long-term investors.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool owns shares of InvenSense and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. 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.

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