Early on Sept. 29, Seeking Alpha reported that Rosenblatt Securities issued a note claiming that there's a good chance that InvenSense (NYSE:INVN) will lose between 50% and 100% of its iPhone 6 sales "due to technical issues."
Rosenblatt reportedly claims that the six-axis MPU-6700 gyroscope/accelerometer inside the new iPhones is problematic.
Due to this note, along with a Baird downgrade last week and perhaps a "sell the news" phenomenon following the iPhone 6 launch, InvenSense's shares are off about 23% from the beginning of the month.
As a result, I finally took a position in the company.
A bird's eye view
From my perspective, InvenSense is a component vendor that has a lot of exposure at Samsung and, following the iPhone 6 launch, now has significant exposure at Apple. InvenSense has the two largest smartphone vendors under its belt, which should mean some good news over the next several quarters as the iPhone 6 ramps up.
The problem that has typically faced these component suppliers, particularly those with high concentration at a handful of customers, is that the customers will want to diversify (or will drive significant price and margin concessions on the threat of diversification).
InvenSense is no different.
In fact, the downgrade from Baird was driven principally by the idea that one of its major customers would start dual-sourcing gyroscopes. Furthermore, Baird reportedly believes InvenSense rival STMicroelectronics (NYSE:STM) is grabbing share at other smartphone vendors.
That's not good news for InvenSense, right?
So why take a position?
While there's definitely merit to the potential doom-and-gloom story here (both the Baird and Rosenblatt downgrades are cause for concern), I think the InvenSense story is far from finished.
First off, we'll have to see if InvenSense is really "out" of the next round of iPhones due to these alleged instability issues. It very well might be, but it's a little difficult to believe Apple would go through the trouble to switch to InvenSense's solution, away from longtime vendor STMicroelectronics, without a really good reason to do so.
Next, while I definitely buy the idea that InvenSense's major customer(s) might want to dual source parts, if InvenSense can provide a superior solution, then it could grab the majority of the orders for a given design ("dual sourcing" doesn't necessarily mean a 50/50 split for a design).
Finally, although InvenSense has high concentration in both Samsung and Apple, I expect that over the long haul more phones and tablets in a much broader range of price points will require sophisticated gyroscopes and accelerometers. It also doesn't hurt that the smartphone and tablet markets will likely grow over the coming years.
In other words, I like the company's long-term picture. And I'm willing to put my money behind it.
It can't get much worse, can it?
One reason I took a position after this downgrade is that, from a sentiment and expectations perspective, I don't think things get much worse barring a downward guidance or some other catastrophic event. The market seems to now be pricing in some issues with the iPhone 6 design win (leading to potential design-out in the next iPhone), and it's even pricing in some business share loss at major customers.
In the case that these events do come to pass, the stock will probably take a further hit, but my guess is that there's a lot "baked in" at this point. However, what if things aren't actually as bad as they seem? What if InvenSense reports earnings and guidance that aren't as cataclysmic as what investors seem to now be pricing in?
In that case, I think that the stock would move higher, perhaps significantly, from current levels.
The risk/reward profile for InvenSense looks pretty good following the recent avalanche of bad news. With investors expecting the worst, I don't think it would take much good news to get the stock back on track.
That being said, small-cap tech stocks, particularly "hot" component plays, are inherently riskier than some of the more well-known "blue-chip" stocks. However, if you're not afraid of what could be a wild ride, then InvenSense stock might be worth a look at this point.