InvenSense is Not a Drone Stock

The growth of commercial and civilian drones is a hot topic among venture capitalists at the moment. The technology is now at a price point such that a multitude of applications are economically viable which in turn drives growth. While the biggest drone company in the world remains private, there are at least a few pure-play stocks we know of which you can use to invest in the drone theme; Parrot (EPA:PARRO) and AeroVironment (AVAV). Another more indirect way to invest in drones is to buy shares of companies that supply the parts needed to make drones. On this theme, quite a few media pundits are coming up with “lists of drone stocks” where many of the “picks and shovels” companies mentioned are taking in only a small percentage of revenues from selling “drone parts”. Let’s take a look at one of these companies called InvenSense.

Click for company website

Founded in 2003, InvenSense (INVN) sells MEMS devices which are primarily motion sensors that can detect an object’s position in 3D space along with audio sensors. The Company had an IPO in November 2011 and since then, their shares have lost -13% with shareholders suffering over -50% losses in the past year alone. While revenue growth has been strong, investors seem to be concerned about falling margins:

INVN_Revenues

With $242 million in cash on hand, InvenSense is well-positioned to weather any losses that they may incur as they continue to grow revenues. The question is, just what industry bets are you placing when you buy shares of InvenSense? The majority bet it turns out, is on smartphones. The InvenSense “mobile” segment along with the “optical image stabilization” segment made up 90% of last year’s revenues up from less than 75% 2 years ago.

INVN_TAM
Source: InvenSense Investor Presentation

The “optical image stabilization” segment grew nearly 100% which InvenSense attributed to “increased adoption of our technology for optical image stabilization in smartphone camera modules”. The “gaming and other” segment includes applications that address such themes as “internet of things (IoT)”, drones, and wearable devices. InvenSense has provided what they believe is the “total addressable market (TAM)” for 6 of these markets, and the potential of the “drone” market is second smallest at $120 million. This makes sense as well. IoT, which they estimate at an $850 million TAM, is expected to need billions of sensors to enable all that information flow. With the number of people using smartphones in the billions, it’s no wonder mobile is their largest segment by far. There just aren’t that many drones being built to match the volume of MEMS devices needed by other high-growth applications like smartphones or IoT. With a “1 billion unit” capability, InvenSense is in the business of volume.

The real problem here is not so much that a small portion of revenue comes from drone applications but more so that an investor is forced to take a large bet on smartphones, and more so, on the companies that make them. 38% of Q2 2015 revenues for InvenSense came just from Apple, up from 0% in Q2 2014.  With another 33% coming from Samsung and Xiaomi, that’s 72% of revenue coming from just 3 customers, a situation which bears a great deal of risk. While InvenSense counts both Parrot and DJI as customers, their sales to drone companies do not seem to be meaningful enough to count this company as a “picks and shovels” play on drones.

InvenSense (INVN) is a MEMS company that has been successful in growing revenues and attracting the biggest customers around which is both a blessing and a curse. Until they can show meaningful diversification of their revenues into other areas, like drones, it will continue to be mainly a play on motion and sound MEMS chips used in smartphones.

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2 thoughts on “InvenSense is Not a Drone Stock

  1. Excellent Nanalysis ! The TAM is what InvenSense believes is in their cross hairs to capture. Given the recent explosion in Drone sales with 1 million drones expected for Christmas 2015 InvenSense might be inclined to raise that.
    But lets go with the $120M TAM. InvenSense is the MEMS of choice for prosummer and hobbiest drones. DJI and Parrot are on board. Kits seem to all gravitate to InvenSense. It is looking like its going to be approaching 2 million drones in 2015. The MPU 3300 is an early entry (2012) drone MEMS of choice. During the past 2 years InvenSense has increased the software content available. The MPU 3300 is $65 from DigiKey. The InvenSense web store indicates they will drop to around $30 when you order 10000 chips. InvenSense would have to get 2 million drone MEMS at $60 a piece to hit the $120 TAM.
    Something is not adding up here. A more realistic value would be 1 million drones at $40 each or $40 Million. What do you think makes up the $120 TAM?

    1. Thanks for filling in some of the missing pieces Kris! Regarding the $120 million TAM, my original thought was that they expect to sell other MEMS products to the drone segment in addition to what they already sell. Maybe a forward looking TAM? Great back of the napkin estimates you have proposed there.

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