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Load Up on InvenSense Now

Monday - 8/12/2013, 4:05am  ET

Even after soaring following a great quarterly report and solid signals of signing up a major customer, InvenSense doesn’t appear to be gaining much traction on the stock market. The stock soared the first day of trading following the report, but it has sold over the days since the report.

Even after surging to new 52-week highs, the motion tracking stock trades with a valuation of only $1.4 billion with plenty of room to grow. The stock soared to $22 following the end of 2011 IPO, so the recent results haven’t even pushed the stock close to all-time highs. Analysts haven’t been overly positive on the Q2 expectations, either questioning the reasoning for the limited excitement over the projected bullish second half of the year.

Elephant in the room

Although most analysts have speculated that InvenSense won the Apple contract from STMicroelectronics , the company hasn’t been able to publicly back up those claims. Now, investors are speculating the true impact of an Apple deal, considering that most expected higher guidance for the current quarter than the $68 million to $70 million forecast by the company.

The CFO made the interesting statement on the earnings call that investors would need to wait for product teardowns in order to get some positive surprises. The comment was an apparent reference to a potential Apple product to be released during the current quarter. Also, investors need to keep in mind that Apple is likely to ramp up as a customer beginning with one or two products initially. The very possible scenario would be for only the new products to contain InvenSense chips so even if the new iPhone happens to contain the chip, the original iPhone 5 will still maintain the STMicroelectronics chip.

One risk to investors is that InvenSense does not actually obtain the Apple contract. The stock would likely swoon with some of the recent gains due to speculation by analysts of a deal. The key is that the CEO claimed huge sequential growth in the earnings report as stated below:

With extraordinary execution, in the June quarter we again shipped a record number of units in that period growing our revenue 43% year over year and expect to again ship a record number of our products in the current quarter growing sequential unit volumes and revenues significantly.

Obviously, business will be strong whether it includes orders from Apple or not. With huge smartphone and tablet growth around the world, analyst Auguste Richard of Piper Jaffray sees InvenSense reporting $290 million in revenue including a portion from Apple. The key is that he sees current fiscal year revenue growing over 25% without Apple and nearly 40% with Apple. A clear sign that Apple is only a bonus to a booming business.

Cheap for the growth

When considering the seismic bump in revenue from a large Apple contract, InvenSense trades extremely cheap. The company sits in the middle of the fast growing motion sensing and tracking sector that is only starting to develop. Due to this potential, a Goldman Sachs analyst placed the earnings bump from an iPhone-only deal for 2014 at nearly 60%. Analyst James Schneider believes that the company could win share due to a clearer roadmap for advanced products and possibly a cost advantage now that historically had been a sticking point.

STMicroelectronics trades at 13 times forward earnings, even though it risks losing an Apple contract and all the millions in revenue involved. With Piper Jaffray placing the revenue switch at around $40 million this year, STMicroelectronics won't be devastated considering the revenue base of over $8 billion. Since Samsung currently provides InvenSense with roughly $20 million-$25 million in quarterly revenue, the long-term impact from Apple could be similar to both companies with InvenSense growing and STMicroelectronics losing.

Apple or STMicroelectronics

This switch in chip suppliers won't have any material impact to Apple, but the stock does offer extreme value. Apple trades at an enterprise value of around 7.5 times earnings. The stock is cheaper and offers a better deal to investors than STMicroelectronics. With STMicroelectronics struggling to even reach profitability, a deal like this that cuts back on revenue again cuts into that ability to be profitable.

Neither stock offers the growth potential of InvenSense, but value investors can definitely benefit from the yearly drop in stock price for Apple and the higher dividend. With Apple's revenue expected to reach near $170 billion this year, it will never again offer the growth potential presented by InvenSense. Investors will need to decide between the growth of InvenSense or the value and dividends of Apple. A portfolio could even include both stocks for the combined growth and value dynamics.

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