There's a good chance that if you bought shares of InvenSense (NYSE:INVN) in the last year, you've lost a bit of money on your investment. Although the share price has mostly recovered from its slide after InvenSense's third quarter earnings release, it's still well-off its 52-week high. But with several problems in the rear view mirror and a new CFO who seems to be a straight shooter, there are plenty of reasons to be optimistic about the company's future.
Here are three of the biggest reasons InvenSense shares could rise.
Opportunities for more content
The majority of InvenSense's revenue comes from its six-axis sensors such as those found in the Apple (NASDAQ:AAPL) iPhone 6 and iPhone 6 Plus. InvenSense said in the company's first quarter conference call that its average price per 6-axis unit is around $1, but that may be a bit lower with the volume Apple is ordering.
Going forward, InvenSense sees the attach-rate for optical image stabilization, or OIS, gyroscopes increasing meaningfully in fiscal 2016, which will contribute significant revenue for the company. Last quarter, OIS contributed 16% of revenue and management believes less than 10% of premium smartphones utilize the technology. Management expects the attach-rate to double this year, which could result in a larger share of revenue from OIS.
Additionally, the company sees opportunity in software, sensor hubs, pressure sensors, and microphones -- all of which InvenSense has invested heavily in over the last couple years through acquisitions and in-house R&D spending. Barrington Research believes those content opportunities will lead to InvenSense more than doubling its revenue per smartphone to more than $2.
While we don't know if InvenSense has won a design in the Apple Watch, it's a very strong possibility that it has. Earlier this year at CES, CEO Behrooz Abdi told The Motley Fool that it currently has a 100% share of the smartwatch market.
But even if InvenSense isn't in the Apple Watch, the new smartwatch from Apple could spur growth within the entire market. Just as the iPhone set off growth in smartphones and the iPad caused tremendous growth in tablets, the Apple Watch could do the same for smartwatches, and InvenSense is poised to capitalize.
InvenSense has worked over the last couple years to shrink its designs into ever-smaller packages that consume low amounts of power. These designs are essential for wearables, where battery capacity is extremely limited. While other MEMS makers are working to catch up, InvenSense's market share speaks for itself when it comes to how well the competition has (or hasn't) been able to compete. Growth in the wearables market -- with or without the Apple Watch -- should benefit InvenSense.
CFO Mark Dentinger told investors to expect gross margin to remain between 46% and 47% for the next few quarters. Even if gross margins remain under pressure, there's good reason to believe operating margin will expand in fiscal 2016.
Dentinger told analysts that the company plans to level off its spending on research and development, after ramping up development to qualify for Apple's designs among other things. That will at least take some of the pressure off of operating margin as the company benefits from the increased revenue from its new design wins.
What's more, there's still some upside to gross margin. InvenSense's investments in software, including the purchases of Movea and Trusted Positioning, increase the likelihood that it will be able to couple software with its chips, which will lead to higher gross margins. In fact, most of its potential growth in content-per-smartphone represents an opportunity to expand gross margin, according to Mr. Abdi.
Long term, InvenSense's goal is to reach a gross margin in the mid-to-low 50's. However, Dentinger told investors it's going to be hard to get there in the next few quarters.
Best in breed
While investors may be disappointed with InvenSense's stock performance over the last year or so, the company still represents the best in breed in a growing market for sensors. With wearables starting to take off in 2015 with the help of the Apple Watch and additional content opportunities in smartphones for the MEMS maker, we could see InvenSense make a rebound this year.
Gross margin may remain under pressure for the time being, but R&D spending as a percentage of sales ought to decline this year allowing more of InvenSense's revenue to fall to the bottom line. Investors ought to reward InvenSense as they start to see the long-term payoff of making a deal with Apple.