Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
This week we had a question from an Inner Circle member about one of the lesser-known tech stocks that makes it money by supplying an essential component to the giants of the industry. InvenSense makes chips that track motion, and its clients include such well-known names as Amazon. Samsung and Google. Now it appears that Apple will become a key customer. Pat examines the details of the projected deal with Apple and its impact on the company’s prospects.
Q: Hi Pat: I was wondering, what are your thoughts on InvenSense? Thanks.
A: InvenSense (symbol INVN on Nasdaq; www.invensense.com), makes computer chips that can track an object’s motion.
A range of consumer electronics use the company’s technology, including smartphones, tablets, wearable computers, gaming devices, cameras and remote controls for smart TVs. Fast-selling products that contain its chips include Amazon’s Kindle Fire tablet, the Samsung Galaxy Note 3 tablet and the Google Nexus 5 smartphone.
InvenSense’s products are also used in industrial applications.
The company is now reportedly adding Apple as a customer. This would include chip designs for the iPhone 6 and updates of the iPad and iPad Mini. InvenSense recently announced that it is increasing its manufacturing capacity to one billion units from 400 million, a major indication that Apple will indeed become a customer.
InvenSense adds two acquisitions to boost its expertise in anticipation of Apple deal
Apple is reportedly planning multiple versions of a smartwatch—or iWatch—later this year. The devices could include more than 10 sensors to track and monitor health and fitness data. InvenSense is a leading sensor maker and is already a supplier for Samsung’s smartwatch.
To add to its expertise in this area, InvenSense is making two acquisitions. One is Movea, a privately held firm that’s a leading provider of software for ultra-low power location, activity tracking and context sensing. For example, Movea’s motion and audio sensors can determine a person’s activity, energy expenditure, speed and cadence.
InvenSense is also buying Trusted Positioning, a privately held positioning-software company. Trusted’s software uses inertial sensors, such as accelerometers, gyroscopes, magnetometers and pressure sensors, in mobile and wearable devices to provide continuous positioning information.
In the three months ended June 29, 2014, InvenSense’s revenue rose 19.3%, to $66.7 million from $55.9 million a year earlier. Earnings fell 44.9%, to $7.0 million, or $0.08 a share, from $12.7 million, or $0.15. The decline was mostly because the company raised its research spending by 139.2%, to $19.4 million from $8.1 million.
InvenSense holds cash of $146.5 million, or $1.65 a share. Its $137.4 million of long-term debt is a low 6.2% of its $2.2-billion market cap.
The stock trades at 43.5 times this year’s forecast earnings of $0.57 a share. However, a deal with Apple could increase that to as much as $0.78 next year. The stock trades at 31.8 times that estimate.
We view InvenSense as a hold for aggressive investors only.
Last week’s Question and Answer on Stocks reported on an acquisition by Canada’s largest copper miner. If you missed it, you can see the article here.
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Pat McKeough responds to many requests from members of his Inner Circle for advice on specific stocks, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. Beginning this week, we give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of our new approach offering you regular and specific buy, hold and sell advice in our daily posts. Every week you’ll get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
