This High Flyer Just Dropped a Bomb

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

You can draw a pretty nice correlation between watching birds and watching stocks.  From a distance watching birds can be quite entertaining (just ask my cat), sometimes they soar majestically and then there are those that mistake the window for who knows what.  Stocks can act in much the same way, flying high after one earnings report and seemingly hitting the window the next.  Like their feathered friends, quite the mess can come from out of nowhere.

That’s one reason why I like to watch high flying technology stocks from a safe distance at first.  You never know when they’re going to drop said mess right on your portfolio.  For a while now I’ve been watching  InvenSense (NYSE: INVN) before adding shares of this mobile player to my paper trading portfolio.  Their most recent quarterly report was interesting to say the least.  

The big bomb dropped on shareholders came by announcing that Founder, CEO and Chairman Steven Nasiri would be stepping down the very next day.  While he’ll continue to serve on the board and serve as an executive of the company through the end of the year, it’s an odd turn of events.  He’s being replaced by fellow board member Behrooz Abdi. The problem is that there were no further details and that wasn’t received well by the market. 

Investors don’t like uncertainty and kicking the founder out of the company for no apparent reason causes a lot of concern.  If they said he was going to pursue other interests or even wanted to spend time with his family it wouldn’t seem so odd.  Something happened and until we know more it’s a fairly bright red flag.

While the goings on in the C-Suite caught the market’s eye, the underlying business is doing just fine.  More of their motion sensor technology is making its way into smartphones and tablets as evidenced by a 28% year-over-year rise in revenue and a 19% increase in net income.  Meanwhile their cash stash rose by 5.5% and is now 16% of their market cap.  Shares might seem expensive at about 30 times trailing earnings but looking ahead that number drops to a mid-teens ratio by 2014.

A good reason for the falling multiple is that they are expecting a 35% rise in revenue next year.  While that guidance is down from the 40% to 50% range they had been estimating, it’s still a pretty healthy clip.  Not to mention that it is based on existing product wins leaving room for some upside potential.  That upside could come if the company can branch out from their current customer base. 

While said customer base is a who’s who of the mobile industry they do lack one key customer in  Apple  (NASDAQ: AAPL).  What’s interesting is that InvenSense attaches most of their sensors to products running on ARM Holding (NASDAQ: ARMH) chips.  That company just happens to supply the chips that are typically in Apple’s mobile products.  Instead of attaching an InvenSense sensor, Apple instead uses STMicroelectronics  (NYSE: STM).  This is an opportunity for InvenSense if they can match their technology to Apple’s desire for maintaining superior margins. 

InvenSense is still a very small and very fast growing company.  For some context, STMicroelectronics generates about $2.2 billion in revenue each quarter while InvenSense generates just $200 million per year.  Meanwhile, Apple’s cash hoard could generate enough interest income to buy InvenSense whole in just one year.  Finally, while ARM enjoys a premium multiple thanks to their cozy relationship with Apple, its InvenSense that analysts expect to grow earnings faster over the next five years at 25% annually against 18% for ARM. 

Despite the potential for a lot of future growth, the abrupt CEO departure just doesn’t sit well.  I’d like to watch the company one more quarter just to make sure there are no more nasty surprises to be dropped on shareholders. The future is bright, and the price is right but something still seems amiss.

latimerburned owns shares of Apple and InvenSense and has the following options: Apple. The Motley Fool owns shares of Apple and InvenSense. Motley Fool newsletter services recommend Apple and ARM Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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