This Motion Sensor Maker is Profiting From Andriod Smart Phones

By David Zeiler, Associate Editor, Money Morning

http://moneymorning.com/2012/03/19/growth-in-googles-android-pays-off-for-invensense-inc-nyse-invn/

 

The exploding number of Google Android devices has become a cash machine for microchip maker InvenSense Inc. (NYSE: INVN). InvenSense makes the tiny motion sensors used in 70% of Android phones and 90% of motion-sensing Android tablets. Mobile device makers have enthusiastically adopted Android, an operating system developed by Google Inc. (Nasdaq: GOOG), because Google licenses it for free.

Growth in Android devices is exploding. At the Mobile World Congress in Barcelona last month, Google Senior Vice President for Mobile Andy Rubin announced that 850,000 Android devices are activated every single day, for year-over-year growth of 250%. That kind of growth offers tremendous potential for a company like InvenSense, which only went public last November. With 512 million mobile devices expected to be sold by 2014, the market for InvenSense promises to be huge.

InvenSense: The Best Performing IPO of 2011

These motion-sensor chips, called Micro Electro Mechanical Systems (MEMS), are what enable mobile devices to react to tilting or shaking. Although MEMS technology has existed for decades, it was when InvenSense's motion sensing chips were used in the Nintendo Co. Ltd. (PINK ADR: NTDOY) Wii controller in 2006 that the technology started to go mainstream.

The following year, Apple Inc. (Nasdaq: AAPL) used MEMS technology in the iPhone, which triggered the revolution in mobile computing. Although shut out of Apple products so far -- Swiss company STMicroelectronics N.V. (NYSE ADR: STM) has an exclusive lock on Apple's MEMS business - Sunnyvale, CA-based InvenSense has done very well by concentrating on Android devices.

Profit for the December quarter rose 117% year over year, while revenue increased 52%. It marked the second straight quarter of triple digit EPS growth. Analysts expect the hot streak to continue in the current quarter, with a 133% pop in earnings over last year's results. The strong earnings have helped make InvenSense the best-performing IPO from the class of 2011. Currently trading at about $20, the stock is up 167% from its IPO price of $7.50 and 142% from its open price of $8.25.

Beyond Android: More Upside For InvenSense

Many analysts see still more upside for InvenSense as the MEMS market continues to grow. The company's six-axis combination gyroscope/accelerometer is a smaller and more accurate option for mobile device makers. "They have a competitive advantage there," Srinivasan Sundararajan of Oppenheimer & Co. told Investors Business Daily. "They are six months ahead of competitors like STMicro in terms of their ability to integrate accelerometers as well as gyros into one chip."

But the company's fortunes could really take off if it can secure another major piece of the MEMS market. Possibilities include Amazon.com Inc.'s (Nasdaq: AMZN) Kindle Fire tablet, which currently doesn't use motion sensors, or becoming a secondary supplier to Apple. Possible challenges for InvenSense include its ongoing competition with STMicro, which scored a win last fall when Microsoft Corp. (Nasdaq: MSFT) announced it would use STMicro's sensor fusion solution in the Windows 8 operating system due out later this year.

Investors should also bear in mind that the recent run-up in the stock's price may make it prone to a pullback (and a buying opportunity); at its current price, it exceeds the one-year target price of $17.67. Still, the stock shrugged off a prime opportunity for a pullback last week. A lock-up restriction was waived on the sale of shares held by company officers on March 7. That put 6 million shares on the market the same day the company offered an additional 500,000 shares, yet the stock rose.

Clearly, demand for InvenSense stock is high, and the company's dominance of the rapidly expanding market for Google Android devices should keep it there for the foreseeable future.