Earlier this week, shares of InvenSense (NYSE:INVN) got crushed as a result of a negative research note from Rosenblatt analyst Brian Blair. The analyst expressed concern over the company's ability to keep the accelerometer and gyroscope combo slot that it just won in Apple's (NASDAQ:AAPL) new iPhone 6.
Blair believes there are technical issues with the sensor, and Apple might soon drop InvenSense as a result. Unfortunately, his thesis is a little light on technical details.
Which theory do you believe?
StreetInsider has now published additional details on Blair's research note. When I first read the original version, I was curious as to why Blair assumed there were technical issues. Now we know.
Blair is primarily boggled by the fact that the iPhone 6 teardowns revealed two separate accelerometers: InvenSense's combo sensor, and a Bosch 3-axis accelerometer. The firm's conclusion was that Apple added the Bosch component at the "last minute" in order to address potential technical issues with the InvenSense part, dismissing the theory that the extra sensor is for power savings.
So there are 2 working theories as to why Apple is using a 2-sensor solution this time around: technical issues with InvenSense components, and power savings. The latter sounds much more plausible. While Apple has made last-minute changes to products in the past (such as adding Corning Gorilla Glass to the original iPhone), it would be rather uncharacteristic and crude to just throw another accelerometer in if technical issues were discovered.
More importantly, the highly technical experts at Chipworks have already laid out the power savings rationale in great detail:
We speculate that the two devices are incorporated to improve the overall user experience, while minimizing power consumption.
The integration of two accelerometers into the iPhone 6 is another example of Apple's elegant engineering. The phone would have worked with just the InvenSense device, but since not all applications require the higher sensitivity and full six-axis integration, Apple added the Bosch device, which allows them to lower the power consumption while still providing a good user experience.
When it comes to technical knowledge about these devices, I trust Chipworks over a Street analyst any day of the week.
Ascendiant Capital quickly rushed to InvenSense's defense, saying that the company's sell-off following iPhone 6 teardowns was overdone. Analyst Code Acree agrees with the Chipworks theory that Apple is really just looking to save power on basic tasks like screen rotation or pedometer functions. InvenSense's higher-end sensor has better performance for gaming applications, but consumes more power to provide it.
It is entirely possible that Apple is dual-sourcing from STMicroelectronics (NYSE:STM) as well, but it seems unlikely that Apple would switch to InvenSense only to immediately ditch the company. Ascendiant expects InvenSense to report record quarters this year, and as such believes that investors should take advantage of the dip to start or add to positions. The firm currently rates InvenSense a "buy" with a $29 price target.
"Buy" is precisely what I intend to do once The Fool's trading policy permits.
Count me in
InvenSense remains a top dog in the growing MEMS market. Approximately 80% of revenue currently comes from mobile devices, but the company will also enjoy growth from the Internet of Things and wearables (which could include Apple Watch) trends, which are just now beginning. The company's strategy of high-performance sensor integration has set it apart from its rivals, and gives it better pricing power.
Shares are priced for growth, trading at 6.4 times sales right now, but I think the company can deliver, so I'll be opening a position in the coming week to take advantage of the dip.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Corning, and InvenSense. The Motley Fool owns shares of Apple, Corning, 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.