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short-term INVN valuation ?3

04:13 28-Jan-16

I've finished going through the InvenSense call, but have little to add from that over my initial notes:

• Dual-sourcing at Samsung: I should probably make it clear that management's comments only indicate that Samsung will be dual-sourcing OIS modules, but that hardly matters given Samsung's current focus on cost cutting.
• Apple: by contrast, the relationship with Apple continues to appear quite healthy, even if Apple does not.  InvenSense should continue to be in new models, including the 4" iPhone rumored for March.
  
• Amazon Echo design win: comments in the call confirm anecdotal information that I've received which indicates that the Amazon Echo uses an array of InvenSense microphones so that it can listen even while playing music.  I've seen these in action and they work pretty well. 

The last bullet point is the most important in my mind.  Though Echo sales are likely only in the hundreds of thousands, which indicates that part volume won't be enough to move the InvenSense needle, this constitutes a second innovative use case of InvenSense microphones from Amazon.  The first is discussed here.  Over the long run, InvenSense being a hub for innovation is what will matter, and that will continue to show itself in everything from air guitars to retail & sports partnerships (note Under Armour's plans, on slide 9, for connected devices & services this year, and hardware partnerships next).

None of this is going to help next week or month, though.  A such, I expect that what readers are most interested in at the moment is short-term INVN pricing.  Unlike in past quarters, I see no particular market activity that should pressure share value.  As already mentioned, InvenSense continues to build the balance sheet, and is now over $3.50 per share in net current assets.  Thus even if we assume break even earnings for the next two quarters, a hybrid P/E of 10 would put current fair value at $7, which I regard as a bare minimum even for the tough quarters to come.  Given the possibility of new partnership announcements, particularly for Coursa Retail, which will help give brick and mortar stores  the same analytical and marketing capabilities as e-tailers, I think 15 is fairer ratio.  That would put shares at $8.75.  All of this is just educated guesswork on my part, but I do believe it is the best way to value shares, once the market gets over the guidance.

While that guidance is somewhat disappointing, I saw what I wanted to from management in this report.  It guided accurately and conservatively in the face of the mobile stagnation that I've talked about over the past year or more.  Again, I expect that to continue until flexible and single-chip devices start to become mainstream, probably in about a year.  Over that time, InvenSense should continue to decrease its dependence on mobile, and this report confirms that it is doing so without incurring unreasonable costs.  I will be happy to be patient and take what the market gives me.

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