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Why I Invested in InvenSense

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January 10, 2014 – Comments (6) | RELATED TICKERS: INVN

Today I pulled the trigger and added InvenSense (INVN) to my portfolio. InvenSense designs motion tracking systems that are used in "smartphones, tablets, gaming consoles, and smart TVs." This includes Android devices, the Wii gaming console, and others. In other words, the ability for your smartphone to automatically adjust between vertical and horizontal mode based on your movements isn't magic: there is a good chance it is enabled through InvenSense's MotionTracking technology.

InvenSense develops "enabling technology" for a variety of electronic consumer devices, to put it in more general terms. 

InvenSense is in a solid financial situation. Between fiscal 2009 and fiscal 2012 sales grew at an average annual rate of 27.25%, with earnings expanding at an average annual rate of 35.94%. InvenSense has continually produced positive free cash flow over the past four years, which has allowed the company to increase its cash pile to $161.53 million with no debt. Operating cash flow production and margins, however, have been relatively sporadic over the past couple years in particular, and will be items to watch closely in the coming quarters and years. 

When I began researching InvenSense several weeks ago, the biggest question mark I had was with the company's management team. CEO Behrooz Abdi came on board in October 2012. Fari Assaderaghi came on as CFO in 2011. Many of the company's executives joined InvenSense within the past few years, which gave me pause considering the business was founded in 2003. I wanted to learn more about this management team particularly because many of them are relatively new to the business.

Thankfully, my research didn't stop there and I found items that affirmed my confidence in this team. Turns out that InvenSense has had a strong showing at the Global Semiconductor Alliance Awards since bringing on Behrooz Abdi in 2012. In 2013 InvenSense was honored with the Most Respected Public Semiconductor Company Award with $100 Million to $250 Million in Annual Sales. The company won the same award in 2012. 

InvenSense was also awarded Best Financially Managed Semiconductor Company (with annual sales of up to $500 Million). In 2012, InvenSense was placed in the top three for this financial management award. It is worth noting that these awards started coming in once Abdi took the reins of the company in 2012, along with the new wave of executive leadership that came with Abdi. 

All in all, InvenSense has a management team developing a business that is turning heads in the industry. Peter Lynch's quote rings in my ears when I think of InvenSense: "Nothing could be more bullish than begrudging admiration from a rival."

After researching the management team -- which confirmed to me that this is a business backed by innovative individuals doing an excellent job -- I was comfortable opening a position in InvenSense. The company is in a great financial situation, which will provide cushion should InvenSense or economy fall onto tough times in the short-term. 

InvenSense has a global presence, including the Chinese market. The company's technology is included in Samsung's Gear Watch as well as the upcoming Google Glass (which should be released in 2014). A relationship with Apple -- which is nothing more than rumors at this point -- would sweeten the pot and add a tremendous amount of value to InvenSense. The bottom line as I see it: InvenSense is a leader in developing motion sensing technology, which will be a necessary component of a growing number of gadgets coming from a wide variety of providers (many of which rely upon InvenSense). 

As with my other investments, this is done with a time frame of 5+ years. Should InvenSense get hammered, I will consider adding to my position. I have confidence in InvenSense's management team, the business is in excellent financial condition, and the company's innovative motion sensing technology is all but guaranteed to be in greater demand in upcoming years thanks to a growing number of gizmos (which will require motion sensing devices) slated to hit the marketplace. 

I should also add that I think InvenSense is quite reasonably priced with a current P/E of 32. Considering: 1) the company's solid financial foundation, 2) the continued success of the company's relatively new leadership team, and 3) innovative products with a bright future -- I am comfortable starting my position at today's levels. 

The stock will likely be volatile going forward (duh), but a P/E of 32 hardly strikes me as overvalued. Given the long-term prospects for InvenSense, I am excited to become a shareholder today. Like I mentioned, I will gladly add to my position should Mr. Market whack shares to lower levels. 

In a sense (lame pun somewhat intended), all investments should be made with the expectation that -- at some point -- they will go down. If market timing works for you, good luck, but it ain't my thing. Be persistent in finding and investing in quality businesses, practice patience throughout short-term market turmoil, and maintain a long-term outlook with your investments. I would have done well to follow this advice over the last decade. Here's to hoping I can look back on this post in ten years and say, "Well done, young(er) Pencils." 

Best,
David K  

6 Comments – Post Your Own

#1) On January 11, 2014 at 2:16 PM, nahag (< 20) wrote:

I had been watching INVN for a couple of weeks, seeing it climb and climb. As soon as I bought a 100 shares, it dropped 3.2% from the 20.37 the price I bought it at. Why the price drop?

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#2) On January 12, 2014 at 1:09 PM, adamlevy (76.68) wrote:

The drop on Friday just looks like typical market action. Volume was up slightly, so it may have been from some institutional selling -- taking gains. I didn't see any news.

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#3) On January 12, 2014 at 3:03 PM, Mary953 (73.63) wrote:

Have you followed the SuperNova portfolio that is (momentarily) free from Motley Fool?  They are looking at four companies in each of four areas.  The first is wearable computing.  INVN is one of the four in this category.  It is also the one that took the entire category as the "Best in Class."  I would have been interested in it for that reason alone, but am extremely grateful for your information.  You have evaluated it in areas that are my weak spots (which includes the sort of financial stuff that causes my brain to freeze faster than ice cream at a skating rink!)  Thanks much!

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#4) On January 15, 2014 at 9:52 PM, TMFPencils (99.81) wrote:

Hi Mary,

Yes, the Supernova research was a big help to me and bumped the company up on my watchlist. After researching the company, I agree with the "Best in Class" win for INVN, although Ambarella would be a close second for me. 

Glad you found this analysis helpful!

Best,
David K  

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#5) On January 18, 2014 at 6:41 AM, Mary953 (73.63) wrote:

How to feel foolish - comment and then realize that there is a TMF before someone's name.  David, thanks for taking time to evaluate INVN on CAPS.  I would expect nothing less than a really detailed but easy to understand post from any of our TMF friends.  I do find your information very helpful.  Even when I do not comment, I am reading and am grateful for your time and efforts.

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#6) On January 23, 2014 at 8:47 PM, TMFPencils (99.81) wrote:

Hi Mary,

I think my transition from 'pencils2' to 'TMFPencils' came between your comments, so no need to feel foolish. :-) Still breaking in the ol' TMF tag. I'm actually contributing to the new Supernova mission launching this month, Explorer 1.  

Thank you for everything you do to keep the CAPS community active! I hope to contribute regularly going forward. Looking forward to more quality discussions and ideas in 2014. 

Best,
David K  

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