Is It Too Late to Buy InvenSense?

InvenSense shares reached an all-time high on Wednesday, climbing as much 7.5%. The stock is up nearly 30% in the last month after the company resolved an intellectual property dispute with rival STMicroelectronics . Now, after a slew of product announcements at Mobile World Congress -- where the company's largest customer, Samsung , announced several products of its own -- InvenSense shares are making another run.

Those who missed out may think that InvenSense is too expensive now. Indeed, InvenSense is expensive almost any way you look at it. It's a growth stock, though, so let's take a look at what you'd be getting for the premium price.

Valuation

*end March 2015
Source: Yahoo! Finance

InvenSense looks pretty expensive when you compare it to the rest of the market. Compared to ST, the company could still be priced fairly.

ST is expected to earn $0.25 per share in fiscal 2014, which ends three months before InvenSense's fiscal 2015. This gives it a forward P/E of 36.4 based on 2014 earnings. Normalizing InvenSense's earnings estimates for the calendar year, the company is expected to earn $0.75 through December 2014. This gives it a forward P/E of 31, still less than ST's.

But, compared to InvenSense, ST is expected to grow earnings more rapidly over the next couple of years, so perhaps it deserves a higher valuation. ST's earnings growth, however, is coming from shedding loss-making ST-Ericsson and improving operating efficiencies. Revenue is expected to decline in 2014, then climb modestly in 2015 back to 2012 levels.

On the other hand, InvenSense is posting strong revenue growth. For fical 2014, revenue is expected to grow 20%, and the company expects to return to 25%-35% revenue growth in fiscal 2015. The Street expects 26.7% growth in fiscal 2015.

What's ahead for InvenSense?
Going forward, one of the biggest growth drivers for InvenSense is the wearables category. The market is expected to grow from just $1.4 billion in 2013 to $19 billion in 2018. InvenSense is poised to take a large chunk of the motion-sensing chips and microphones in these diminutive devices.

The company works closely with both Samsung and Google, leaders in the burgeoning market. Last quarter, InvenSense management reported that it accounts for 50% of Samsung's design wins in its category -- up from 30% two years earlier. With reported design wins in Samsung's flagship smartphone, the Galaxy S5, and the likely inclusion of its technology in the company's Galaxy Gear line of wearables, InvenSense is poised to ride the growth in the category as it latches onto current leaders.

Moreover, InvenSense could see growth with Chinese manufacturers. In the fourth quarter, smartphone maker Xiaomi climbed to account for 16% of the company's revenue. Other Chinese OEMs, looking to compete on cost, may choose InvenSense chips because of their strong integration with Android. As the majority of smartphone growth is coming from the low end, InvenSense's ability to win designs in more low-to-mid-range phones will help it grow sales.

There are two smaller areas where InvenSense is growing as well: microphones and OIS. The company acquired its microphone business from ADI last year, and is working to integrate that technology into wearable solutions with AlwaysOn capabilities. OIS, which stands for optical image stabilization, utilizes a gyroscope to better focus the camera lens in smartphones. The technology is slowly gaining adoption in high-end phones.

Buy high, sell higher
The investment thesis with InvenSense is still strong, and its valuation might be high, but it's not out of this world. Its chief competitor sports a higher PE, but isn't growing revenue to support that profit in the long run. InvenSense has several catalysts for growth in the long run, and expects strong revenue growth next year.

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The article Is It Too Late to Buy InvenSense? originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends InvenSense. The Motley Fool owns shares of InvenSense. 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.

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