RW Baird increased its price target on InvenSense (NYSE:INVN) for the second time in five weeks on Monday. The target increase stems from the belief that InvenSense is the only MEMS chip supplier for the Samsung (OTC:SSNLF) Galaxy S5 and growth opportunities from a potential wearable device from Apple (NASDAQ:AAPL).
These are both strong possibilities for InvenSense, but the idea that the analyst hadn't priced this potential into its last upgrade, just last month, seems farfetched.
The biggest thing that's changed in between target raises is InvenSense's price -- up 16% since the day before the last upgrade. With shares already touching the firm's price target, it either needs to increase its price target or shed its outperform rating. It might as well give shares a $40 price target.
Don't get me wrong, I'm not saying shares will go to $40. I'm saying InvenSense has a strong future, and its current price only plays a small role in whether to buy into the company. If you like it at $20, you'll probably still like it at $23.
Samsung has played a large role in InvenSense's recent success. Over the last two years, InvenSense has increased its share from 30% of Samsung's designs to 50%. The company expects that number to continue improving as it works more closely with the Korean electronics maker.
It's likely the company tapped InvenSense for its motion sensing chips in the Galaxy S5 this time around. It's not tapping InvenSense for more of its low-end phones, it's asking it to supply chips for high-end devices like the Galaxy Note 3. The Note 3 included InvenSense's MPU-6500 6-axis combination gyroscope and accelerometer. STMicroelectronics won the 6-axis design for the S4 last year.
InvenSense's newest 6-axis chip, the MPU-6515, is specially designed with the latest version of Android in mind. Using the chip would help Samsung extend battery life and improve core processing capabilities. Considering Samsung has been tapping InvenSense more frequently, it shouldn't be a surprise if the teardown shows either the MPU-6515 or its predecessor.
Moreover, Samsung continues to lead the charge into wearable devices with its Galaxy Gear line. InvenSense won the design in the first generation of the device, and it would be a surprise if the company changed courses. InvenSense is focused on providing low-power "AlwaysOn" chips especially suited for wearables. Perhaps it can leverage this strength into more smartphone designs going forward.
InvenSense has yet to win a design at Apple, despite a steady stream of rumors. Most recently, the company was rumored last week to have won a design in the iPhone 6. A note from Needham the next day indicated that there was no indication InvenSense has an optical image stabilization design win with Apple.
If InvenSense does win a design with Apple for the iPhone 6, it would give the company a significant revenue boost. Apple may have decided to transition to a 6-axis sensor, but InvenSense will still have to compete with STMicroelectronics and Bosch for the socket. The company doesn't have the advantages of strong integration with the OS like it does with Android OEMs. Thus, while still a strong possibility, it's less likely InvenSense will win the iPhone 6 design compared to the Galaxy S5 design.
Should Apple prove a separate rumor true, however, and release an iWatch, InvenSense does hold a few advantages that could lead to its first design win with Apple. Most notably, InvenSense is working to optimize its chips' power consumption and provide AlwaysOn capabilities. Its newest 6-axis design, the ICM-20628, draws just 20 milliwatts of power -- a 60% reduction from the previous generation -- and less than any competitor.
Power consumption is a primary concern in wearable design, as battery size is smaller and battery life is of even more importance than smartphones.
Ignore the price target, focus on fundamentals
InvenSense's future looks bright. The company continues to gain share at the largest smartphone manufacturer, and it has leading technology suited for the next step in mobile computing. All of these rumors don't make the company cheap, though. At a forward P/E around 35, it trades at a premium to the market.
Nonetheless, InvenSense looks like it can support that valuation as it continues winning new designs. The company expects to accelerate revenue growth in fiscal 2015, after slower growth in 2014. A design win with Apple, either in the iPhone or the rumored iWatch, would add significantly to earnings, but the company still has plenty of room to grow in the Android camp including strong potential in the Galaxy S4.