Iphone

Source: Apple

Teardowns of the Apple (NASDAQ:AAPL) iPhone 6 and 6 Plus revealed that the rumors are true. InvenSense (NYSE:INVN) won a the accelerometer/gyroscope socket in the new Apple designs, striking yet another blow to rival STMicroelectronics (NYSE:STM).

Although rumors have been floating around since the beginning of the year and steadily gained traction as we moved closer to the iPhone 6 launch, it was hard to be confident the MEMS chipmaker would show up in the teardowns. Last year, investors were disappointed after the teardown revealed rumors that InvenSense had won a socket were wrong.

This year, however, investors have a lot to be excited about. Not only are the rumors true, this iPhone launch is looking like the best one yet.

The writing on the wall
To its credit, InvenSense's management did a pretty good job of keeping its Apple design win quiet ahead of the iPhone launch, but there's only so much it can do. When the company released its fiscal fourth quarter results in May, it showed further additions to its inventory, which negatively affected InvenSense's bottom line. Over the last six months of its fiscal year, inventories nearly doubled to $73 million from $38.5 million.

All the while, management continued to tell investors that "we continue to have near-term opportunity at a large mobile OEM customer." Additionally, management told investors last quarter that it expects to have at least one new 10% customer this quarter and into the future. It could have been Amazon.com, since its tablets and new smartphone feature InvenSense chips. But now it's clearly Apple.

But what should have given it away was the decline in Samsung's (NASDAQOTH:SSNLF) expected contribution to revenue. For the current quarter, InvenSense expects Samsung to represent just mid-20%-30% of revenue. Last quarter, Samsung accounted for 30% of revenue after slow smartphone sales, and it accounted for 47% in InvenSense's fourth quarter. The only company capable of balancing Samsung like that is Apple.

So what does it mean for investors now
InvenSense stock did trade down slightly after the teardowns revealed it had indeed won the design in the new iPhones, but it seems many investors expected as much already. Revenue and earnings estimates have climbed significantly over the last three months as analysts factored in a probable iPhone win.

For the fiscal year 2015 ending in March, analysts expect InvenSense to generate $367 million. Management had previously guided for fiscal 2015 revenue of $315 million-$341 million without any additional design wins like Apple. That means that analysts are factoring in at most $50 million worth of Apple design sales over the next six months.

That seems low. On the latest earnings call, CEO Behrooz Abdi told investors that the average selling price of its six-axis chips -- the chip in the new iPhones -- was in the $1 range. Even if you move to the low-end, say $0.85 per unit, that means analysts expect just 61 million new iPhone 6 units sold over the next six-plus months. Apple could easily surpass that mark by December or January based on early indications of demand for the new iPhones.

Www
InvenSense's tiny 6-axis chip (outlined in black) finally made it on the iPhone. Source: iFixit

Meanwhile, InvenSense continues to gain share from STMicroelectronics at Samsung. The Korean electronics giant is still, by far, the largest phone manufacturer, selling more than twice as many units as any other company last quarter. InvenSense has steadily increased from 30% share at Samsung in January of 2013, to a 50% share at the beginning of this year, and Abdi expects it to climb to a 70% share this year. Most of that share is coming from STMicroelectronics.

What's next for InvenSense?

Aplwatch

The Apple Watch is yet another opportunity for InvenSense Source: Apple

Keep in mind that InvenSense's outlook didn't factor in any potential design wins in wearables either. With Apple adopting InvenSense in the iPhones, it increases the likelihood that InvenSense has also won the Apple Watch design. Based on early surveys and estimates, the Apple Watch could add tens of millions of dollars to InvenSense's top line.

Analysts currently estimate InvenSense will generate just $96 million in its fiscal fourth quarter. The Apple Watch could add $5 million-$10 million on top of that. But there's also the factor that the Apple Watch could spur sales of competing watches with InvenSense chips in them.

InvenSense is leading the competition in size, power consumption, and what it calls "AlwaysOn" capabilities, which makes it a top choice for wearable computers. Samsung has tapped it for its Galaxy Gear line of smartwatches. It's also in LG's smartwatches, the new Moto 360, and Google Glass.

Remember that InvenSense kept a tight lid on its Apple design win despite all of the rumors flying around. There are bound to be other relatively big design wins for the company that we simply don't know about. With Apple in hand, the future looks bright for InvenSense and the stock looks like a solid buy after trailing off recently.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and InvenSense. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), 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.