The Motley Fool gets more coverage here at Stock Gumshoe than pretty much any other newsletter publisher, with the possible exception of Stansberry — partly because the Fool has had some very good picks over the years, and partly because they have one of the biggest email lists around and they push a lot of teaser pitches out the door to readers like you.
Who then ask us questions.
Which spurs us to take a look. So … here we go!
The latest pitch is for another growth stock in the Fool’s stable, a recommendation from their Rule Breakers service (that’s the growth-focused letter led by David Gardner, the tech and growth-focused founding brother of the Fool). And it ties in some of the hot topics that almost always get investor attention, like wearable technology (which is a hot topic at the Consumer Electronics Show in Las Vegas this week, too, so it’s generating headlines for “smart watches” and the like) and, of course, it also invokes the name of the most-discussed stock on the planet on any given day, Apple (AAPL).
They’re not picking Apple here, though several Fool newsletters have suggested AAPL in the past and the Fool owns shares (unlike most publishers, the Fool actually invests some of its own corporate balance sheet), but they are playing off of a much-watched Tim Cook moment last year and saying that he “let something slip” that indicates where Apple’s going and how we’re going to get rich. ( I own Google and Apple shares, too, just for disclosure’s sake).
The “let slip” bit was Tim Cook showing that he was wearing a Nike Fuelband, at the time that everyone was chattering about how likely an “iWatch” might be and when it might come out. At the All Things Digital conference back in May, he talked quite a bit about the Fuelband and the prospects for wearable computing, but his talk then actually was fairly pessimistic about whether a “multi-use” watch or something like Google Glass would catch on in a meaningful way — he mentioned the Fuelband because he liked the simplicity and the single purpose (tracking your physical activity).
There are lots of similar single-purpose wearable mini-computers out there, including Google Glass and the various smart watches and wristbands and smart clothes and health monitoring devices, and the “wearable computing” trend is continuing to be a massive trend according to most prognosticators … it’s just that it’s hard to tell if it will be a big and broad trend with lots of different successful products, or whether it will be a single product (like the smart watch or oft-rumored “iWatch” or Google Glass) that does a lot of things and becomes a blockbuster mass-market hit product like the iPhone.
Here’s the first part of the spiel from Motley Fool Rule Breakers:
“Read between the lines carefully enough…
“… and you’ll realize there are actually two ways to grab the mountain of cash that Apple CEO Tim Cook is waving in front of your face.
“The first way is by investing in Apple directly. And claiming your share of its dividends and capital gains in the years to come.
“But I bet a lot of you are doing that already.
“So I want to tell you the second way….
“Just think back to the spring of 1977…
“Computers were rapidly becoming smaller; a machine that once barely squeezed into a warehouse could now fit onto a desk! And the undisputed king of the mountain was IBM.
“But your best investment at the time was a company that didn’t even sell computers.
“You know this company as Intel.
“And of course you also know that Intel supplied one tiny little component for computers…
“… a component so sophisticated and so essential to manufacturers like IBM (along with Compaq, Hewlett-Packard, Dell, etc.) that every $5,000 invested in Intel stock back then has grown into more than $747,112 today.”
So this is, at least partly, a “buy the Apple supplier” tease — we’ve seen these before, pitching everything from Corning (GLW) to Synaptics (SYNA) to Nuance (NUAN) to TriQuint Semiconductor (TQNT) or Skyworks Solutions (SWKS), the hardware or software providers or chip makers whose products get found inside the latest iWhatever when the first ones come off the production line and get torn apart to see which vendors “won” a spot in the latest hot product.
This pitch isn’t for one of those companies, though — so who is it? More from the Fool:
“SO HERE’S THE $747,112 QUESTION FOR INVESTORS LIKE US TODAY… WHO’S APPLE’S INSIDE SUPPLIER?
It’s actually the same question Apple CEO Tim Cook is asking himself right now, too….
“Apple has pulled together a team of more than 100 of its best engineers and product designers, to work on a new device that will ‘make the iPhone seem as cutting edge as a horse and buggy.’ (To quote Wall Street Journal reporter Ralph Gardner, Jr. once again.)
“I even checked the classified ads on Apple’s company website! And it turns out these rumors are 100% legit.
“Apple is even hiding away this project team in a top-secret facility offsite from its headquarters in Cupertino, CA. Which means that even Apple’s 80,200 other employees are hearing this story in whispers, too….
“So the smart money says that Apple will sell the lion’s share of these 485 million devices.
“Just multiply that number by $299, $349, $499 or any price that sounds reasonable, and you’ll see why Tim Cook has called this market ‘incredibly interesting’ and ‘ripe for exploration.’ And why that feels like the world’s biggest understatement.
“But meanwhile, the even smarter money says that there’s a way for us to win here regardless of whether Tim Cook is truly ready to fill the shoes of his mentor Steve Jobs.
“By investing in the supplier that Apple and ALL of its competitors will eventually need to do business with, if they want to fully capitalize on this ‘post-smartphone’ market opportunity.”
So they go into a lot more detail, including the chatter about Apple filing for “iWatch” trademarks, and various newish patents for wearable devices or screens that wrap around your wrist.
We can pretty much sum it up as, “Apple is obviously working on hot new wearable computing devices, whether an iWatch or something else, but we can’t be sure it will come out soon or be a hit so you should buy a great supplier of chips that all the tech companies need for their wearable devices.”
But then we get into the details about which company the Fool is teasing — and no, it’s not the same micro-electro-mechanical sensor stock that we saw teased for much of last year by Michael Robinson (that one was STMicroelectronics, STM), here are some of those clues:
“1. All wearable computers will have motion sensing as their core feature. That’s why they’re a revolutionary advance on smartphones. Why we’ll be able to use them without pecking into a tiny keyboard. And why they’ll eventually replace our TV remote controls, hotel keys, parking meters, ID cards, passwords, tickets… you name it. Literally putting everything in the world at our fingertips faster than you can wave your hand and say ‘Open Sesame.’
“2. The motion sensing microchip in the Nike Fuelband, which is the same one that Apple is currently experimenting with in the iPhone, ISN’T GOOD ENOUGH.
“3. There’s a better one. And odds are, it’s in your kid’s bedroom.
“The European company that makes the microchip in the Fuelband is called STMicroelectronics.
“Half of the management is French, and half is Italian.
“They probably have some great coffee & sandwiches in their lunchroom.
“But I wouldn’t invest in their stock.
“Meanwhile, the company that makes a better motion-sensing microchip is located 10 miles from Apple’s headquarters.
“They recently doubled their office space. Doubled their production capacity. (And more than doubled their stock price, too.)
“And – even though they already do business with Google, Samsung, LG, and Nintendo — a ‘channel check’ researcher at Piper Jaffray is now reporting that they’ve expanded the scale of their design work so rapidly that there’s only one company in Silicon Valley large enough to account for all that activity.”
And we even get a cute little map in the ad, showing how very close this “secret” company is to Apple’s headquarters … just “10 miles of California highway” between them.
So who is it?
Well, it won’t be a new idea for the Irregulars today but this is … Invensense (INVN), which we’ve written about from time to time since I featured them as an “Idea of the Month” stock back in the Summer of 2012.
Invensense specializes in “multi-sensor on one chip” MEMS chips, the ones that have both a compass and an accelerometer and whatever else combined into one chip for maximum efficiency and speed. And the stock has been wildly volatile for several years, both because it’s growing fast and because they’ve been in patent disputes with STMicroelectronics — my read on their patent position is that it shouldn’t be crushingly negative, they’ve already made good progress in fighting off some of the complaints, but I would never bet the house on the outcome of patent litigation and they could certainly take a hit eventually.
Most recently the stock took a tumble after preannouncing slower growth and not getting built into the new iPad last Fall, but has since recovered mightily on the strength of general chatter about “wearable computing”, new design wins and new chip releases, and the perception, at least, that they’re out in front of their competitors on making these motion sensing chips better, smaller, and more suitable for more and more consumer devices. INVN made their name and their first stock market impact thanks to being built into the controllers for the first Wii from Nintendo, and falling sales of that product helped drag the shares down in recent years, but they are a major Samsung supplier and are showing good prospects for revenue growth with or without selling into some new Apple device, so I’m pretty pleased with the stock (and wish I’d bought it personally 18 months ago, not just written about it for you) … but it’s no longer cheap, and it’s getting quite a bit more attention from the Motley Fool and others than it was a couple years back.
That means there’s less margin for error, I’d say, with the stock trading at about 40X current-year earnings and 28X next year’s earnings estimates … but if you think the market will continue to look for and highly value growth stocks, then Invensense is likely to still do pretty well. The chatter about wearable computers from the CES in Las Vegas this week has been hot and heavy, for sure, and Invensense seems to have a solid presence at the show and has released new products this week, and also popped recently on a positive analyst report. Often when the only real negative for a growth stock is “it’s kind of expensive” it keeps moving up and getting more and more expensive — they’ve increased capacity, they’re building out for the wearable sensor market in all kinds of ways, and perhaps we’ll all have our temperature-sensing clothes, step-sensing shoes and belt-mounted video cameras run by Invensense chips in five years (the “Internet of things” and wearable computing trends are driving quite a few stocks and quite a few newsletter teases — the Fool has also been pitching Sierra Wireless, SWIR, for the “Internet of things” recently). The company is growing nicely, it’s not cheap or without risks but is trading at a fair price as long as that growth is as good as analysts think it will be … so I haven’t gotten around to buying it myself, but certainly don’t see any solid reason to sell it at the moment.