Investing in companies that provide regular, positive performance surprises is one method investors use to outperform the market. The motion-tracking industry is thoroughly primed to provide many such benefits to investors in the device suppliers such as InvenSense (NYSE:INVN), STMicroelectronics (NYSE:STM), and Bosch. These companies have so many end markets that are already skyrocketing, or are right on the verge of liftoff; markets such as mobile phone and tablet navigation and context, wearable computing, fitness, medical, voice control, and audio monitoring integrated with alerting and response.
Much of this promise is already built into the stock prices of these suppliers. To outperform expectations, therefore, results must surprise even their managers. Managers see growth coming in four broad categories, but each is evolving so rapidly that it's difficult for them to predict. Consequently, the managers remain steadfastly conservative in their predictions, which opens the door wide for upside surprises.
Mobile phone and tablet marketplace
Motion-tracking devices for smartphones and tablets made up 85% of InvenSense's sales in its recent fiscal year. Samsung Electronics (NASDAQOTH:SSNLF), the largest supplier of high-end Android mobile devices, is its largest customer by far, comprising 47% of sales. But a major new player, Xiaomi, has arrived on the scene in China. Xiaomi is not only supercharging already surging sales in the region, but it will lessen the dependence of the suppliers on Samsung. In turn, this should bolster the pricing power and profitability of the suppliers.
STMicro's last earnings report claimed "increased wins across Greater China," while Behrooz Abdi, the CEO of InvenSense, spoke of "geographies like China where adoption of MotionTracking and audio solutions by major consumer electronics customers represent a significant opportunity." The accelerating arrival of new mobile device consumers in China, in combination with the new local manufacturer, could easily produce an upside surprise in sales and profitability.
Wearable computing marketplace
When asked which of the many categories of wearable products looked the most promising in the near term, Abdi replied "watches and fitness... Fitness though is much faster growing, there are a lot more customers." Abdi later cautioned about the speed of adoption of wearable computing. "We're definitely getting much better traction in the wearable devices; but again, we downplay the wearables just because of the volumes until the second generation of wearables ... make it out there," he said.
The suppliers, however, aren't sitting on their laurels. InvenSense unveiled its 7-axis product (with an accelerometer, gyroscope, and pressure sensor for altitude) at the 2014 Mobile World Congress. Its immediate value is to provide a significant step up in navigation and context awareness for phones and tablets, but its largest target is the wearable market. Now being "sampled" by prospective customers, Abdi anticipates that it will contribute meaningfully "next calendar year."
Both STMicro and InvenSense have recently developed very low-power 9-axis products for "always-on activity tracking," which will be big drivers in the next generation of wearables. STMicro released a smaller, discrete pressure sensor last quarter. All of these wearable initiatives are ripe for upside surprises over the next few years.
Optical image stabilization marketplace
Image stabilizers let phone and wearable cameras capture sharp photos even while the user is in motion or in dim lighting conditions, which for most phone and wearable camera users is pretty much all the time. Abdi described this market for 2-axis devices as "nascent and fast-growing." He further called out "continued strength in China" for selling these devices. This rapidly growing consumer demand combined with a rapidly growing consumer base is the perfect combination for upside surprises.
Synergies between audio and motion tracking
Last Autumn, InvenSense bought the microphone division of Analog Devices in order to bring its micro-device manufacturing prowess to audio. Abdi asserted that "audio sensing is highly complementary to motion sensing and we will continue to drive synergies between the two." This would offer a fifth way to micro-electronically sense the world, after accelerometers, gyroscopes, compasses, and pressure sensing; and all would be fused by always-on algorithms running on their Digital Motion Processor. If and when they discover one or more compelling applications, there will be upside surprises.
Though InvenSense, STMicroelectronics, and Bosch are all competing head to head in the motion-tracking micro-electronics industry, there are so many diverse end markets growing swiftly that all three suppliers have significant opportunities for regular upside surprises over the next few years.
InvenSense may be the smallest and the only pure-play supplier of the three, but this makes the effects of upside surprises the most rewarding to its investors. In my opinion, InvenSense is the supplier with the best opportunity for explosive share appreciation.