Immersed in Immersion

Real Money Pro readers may be familiar with my past as a sell-side analyst covering the mobile phone food chain, from then-stalwarts Motorola and Nokia (NOK) (Motorola's mobile business is now owned by Lenovo and Microsoft (MSFT) acquired Nokia's handset business earlier this year) to wireless chip companies such as Skyworks (SWKS) and Qualcomm (QCOM) and their competitors and suppliers. Soup to nuts, I covered the entire food chain. To me it was a great way to not only get data points up and down the ecosystem, but also realize which companies were gaining traction and which ones were not. Over the years, I've seen my share of would-be up and comers that were expected to significantly disrupt the playing field. From silicon-based RF power amplifiers that would replace the gallium arsenide ones offered by Skyworks, RF Micro Devices (RFMD), Anadigics (ANAD) and others to new types of LCD screens, including organic light emitting diodes (OLED) from a variety of public and private companies, including Universal Display (OLED). More often than not, these story stocks fizzled out before long. While many companies tend to brag about design wins, remember that it's not just the conversion from design win to shipping product that matters. Nope, in the smartphone world of today it's increasingly important to be on the hot product that consumers want. In other words, just because a company's products are in a model that hits the shelves does not guarantee strong demand down the road. It seems we are seeing this again. One example is GT Advanced Technologies (GTAT), which is supplying sapphire glass to Apple (AAPL) for the much-anticipated iPhone 6. As that arrangement has been uncovered, GTAT shares climbed to a 52-week peak of $20.54 -- more than a double the February low of $9.54. With new talk that one of the iPhone models may be pushed out, GTAT shares have come under pressure over the last few weeks. Another example is in the shares of Immersion Corp. (IMMR), a haptic sensor company that has been kicking around the mobile space for a number of years. Immersion's software improves the overall usability of mobile device by adding touch feedback, which makes the screen vibrate when pressed, such as when dialing a number. I first ran into the company back in 2006 and, as you can imagine, the company was very bullish on the adoption of its products in the mobile phone -- and soon to be smartphone -- space. Flipping through Immersion's recent 10K, we find it has made inroads into the mobile device space with Samsung, Motorola, LG Electronics, Fujitsu, NEC, and Xiaomi. The software will be used by Huawei to create a better user experience by adding tactile feedback to its mobile devices. Despite those wins, however, the company has had a long history of delivering operating losses over the last several years. More recently, however, it looks like Immersion has turned the corner and Wall Street analysts have been calling for the shares to deliver earnings of $0.41 per share this year, up from EPS of $0.13 last year. Impressive, but what has IMMR shares moving of late -- up to a high of $14.40 recently from the $10.50 area in early June -- is news that the company inked a multiyear deal with Huawei. The question is whether IMMR shares have gotten ahead of themselves. My take is that they have. First, we've heard from Samsung that there are inventory concerns in the smartphone market, and my bet is it's really in Google's (GOOGL) Android operating system smartphone market. Second, despite the win with Huawei, odds are it will take time to happen. But the real question is just because Huawei builds it, will consumers buy it? Third, Immersion has had wide misses on the bottom line over the last few quarters, and while traders may be excited over the Huawei announcement, the reality of smartphone inventories could drive another miss at Immersion. Finally, if the June quarter or the deal with Huawei was so good, then why would some insiders be selling their shares only a few days after the Huawei deals was announced? At a minimum, Real Money Pro subscribers should let the froth come out of this story stock before plunking down dollars, rather than listen to the talking heads looking to pump the shares higher.

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