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InvenSense Valuation and Market Dynamics +2

20:14 26-Sep-15


In response to the recent iPhone wins, a subscriber writes:
This stock can use every bit of good news. Regardless it seems the stock just keeps going down. It certainly has to be worth more than $9. Of course I said that since it was $16, 15,14,12 11 and so on. At this rate I may just lose my entire investment. What a horrible stock this has been over the last 12 months.
I was fairly cautious about the stock at many of those prices, but I can empathize.  The market is currently worried about entering a multi-year down-trend but, while volatility is likely to continue, I think the need for yield will win out and an extended bear market will be avoided.  In any case, I've long found sentiment to be antithetical to successful investing and there is safety in value.  So, a little math from my upcoming SA article:
(4Q15 + 1Q16 + 2Q16 + 3Q16) = 1yr Revenue x PE ratio = Earnings Share Price
$0.12 $0.14 $0.15 $0.18 $0.59 15
 $8.85

Current Assets - Current Liabilities = Net Assets / Shares Outstanding = Assets per Share
$350M $55M $295M 91.7M
 $3.22

That's right, even after three major acquisitions, InvenSense now has higher profit, and more assets than a year ago, when it was valued at nearly 3 times the price.  Even ignoring that average analyst estimates are likely to be revised upward based on the now-confirmed business, this represents a current INVN fair value of $12.07, or a 34% gain.  That said, there's more to look at than just the current business.

The InvenSense developer conference is coming up in less than two months, and it will allow third-party developers to showcase their applications.  Seeing what some of these 27,000 programmers have to show may be even more interesting than the innovations coming from InvenSense employees.  Furthermore, if the foldable mobile devices from my OLED update really are coming as soon as January, that would be a huge boon for InvenSense, as is the transition of InvenSense from MEMs supplier to SoC designer with its Firefly product line set to enter new devices next quarter. 

It's no surprise that INVN prices have been dominated by short term trading for the past year.  Now the conclusion of that article has played almost to the penny, and management is building for a time when the company will step beyond simply being a parts provider for the mobile market.  Instead, the company will seek to start doing distributed processing of the raw data from its sensors and will provide services that flow naturally from that information.  Successful implementation of this strategy will almost certainly require time and partners.  Alphabet/Google (GOOG) through the evolution of its Android ecosystem from pure software to fully integrated vertical service is specifically mentioned.  Although there is always execution risk, the S-8 and cross-licensing agreements that were brought up in prior articles are hints that such arrangements are well underway.  I continue to expect one or more significant transactions in the months to come.  In the meantime, recent developments in the business fundamentals, in combination with market dynamics and valuation, make this finally look like a good time for investors to adopt a long-term outlook as well.