InvenSense (INVN +0.00%) has had a rough couple of quarters, and warned that this quarter might not be what analysts were expecting. The long-term investment thesis, however, remains intact, as motion sensing and motion tracking features creep into more devices.
There's a large opportunity out there for InvenSense, which currently relies heavily on Samsung (NASDAQOTH: SSNLF) as a customer. One trend indicates that it's not about to let the competition take that opportunity away.
The 1 chart that signals a bright future
Source: InvenSense research and development expense data by YCharts.
As you can see, the amount InvenSense invested in R&D has rocketed up in the last twelve months. In fiscal 2014, InvenSense spent $48.4 million on R&D, a 78% increase from the prior year.
Revenue has yet to follow the increase in R&D, but that doesn't mean the money is being wasted. The last time InvenSense invested this much of revenue in R&D it led to years of 30%-plus revenue growth. Management expects to return to 25% to 35% revenue growth in fiscal 2015, and the investment in R&D is likely a driver of that growth.
What exactly is InvenSense investing in?
There's a huge opportunity in motion sensing. Only 50% of smartphones have gyroscope chips. Gyroscopes are simple sensors that detect motion from your handset.
Most handsets without gyroscopes are sold in developing markets like China and India. InvenSense is working on capturing a larger portion of the developing market in order to boost its share of smartphone gyroscopes from the low-20% range. CEO Behrooz Abdi expects InvenSense to account for 40% of smartphone gyroscopes this year.
Even with significant growth in share, InvenSense still has a large and growing market to attack. Working to reduce prices or improve technology should allow it to capture more design wins.
InvenSense is also working on low-power AlwaysOn chips suitable for wearable devices, but investors already know about InvenSense's potential in wearables.
In the long-run, the market rewards revenue and profit growth. There are only two ways for InvenSense to grow revenue significantly: design wins and innovation.
Last quarter, CEO Behrooz Abdi indicated that part of the increase in R&D spending was tied to "new customer qualification activities." He noted these efforts already paid off with design wins, and he expects them to contribute to significant increases in market share.
InvenSense is in need of new customers. Last quarter, Samsung accounted for 47% of its revenue. With the Galaxy S5 launch out of the way, management expects that number to go back down to the mid-30s, but it's still extremely high. Unfortunately, management expects that number to decline due to weakness at Samsung, not strength at other customers. Samsung's mid-to-low-end phones are becoming increasingly commoditized by other OEMs, which is bad news for InvenSense.
Moreover, R&D efforts are focused on transforming InvenSense into a motion tracking company from a motion sensing company. Motion tracking can be of tremendous use for companies developing wearables, where tracking movements, instead of just sensing that it's happening, can result in more innovative products and solutions. To that end, InvenSense is working to further integrate software with its MEMS chips.
Spend now, profit later
Management at InvenSense is working toward long-term profit growth, which is exactly what buy and hold investors need. The company already has industry-leading technology, but seeing the opportunity ahead of it, is ramping up R&D significantly. This quarter, management expects to spend $14.9 million on R&D compared to $8.1 million last year, an 84% increase. As long as management continues to operate this way, InvenSense looks poised for growth.
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