2023-07-13 06:31:45 ET
Summary
- Immersion Corporation can be considered an interesting investment due to its high profitability, modest valuation, and impressive balance sheet. However, declining revenues and patent disputes pose risks.
- The company sells haptic technology to different verticals. The automotive segment and VR/AR could provide new revenue streams, but the company's heavy cost control could limit growth.
- Immersion is currently involved in several lawsuits over patent infringements. The outcomes of these cases could significantly impact the company's future, dissuading or persuading potential customers.
In my opinion, at $7.16 per share Immersion Corporation ( IMMR ) looks like a possibly interesting position to add into a portfolio. The company has proven very high profitability as they have cut research and development costs as well as the sales force. With a currently modest valuation and an impressive balance sheet, I still hold IMMR stock at a hold-rating as the company’s revenues are on a slow decline and as Immersion’s patents are under significant attack. The company seems to have stagnated in its progress, though. Possible new customers would create significant upside, which is why I think the company is worth having on a watchlist.
The company
Immersion Corporation develops and produces haptic technologies that essentially make devices more immersive to touch. The company sells licences to its technology to companies that want haptic feedback in their devices. Its customers include Samsung, Sony with its PS5 DualSense controller, and Microsoft. Immersion’s main segments are consumer electronics, virtual reality, and automotive.
I believe Immersion’s automotive segment has upside potential in customers as touch screens are becoming more common in new electric vehicles. In addition, the company has expressed that the DualShock PS5 controller has had lots of positive feedback, that could translate into new clients as explained by interim CEO Jared Smith on PSU’s article :
The positive market reception of the DualSense controller has catalyzed increased market interest in haptics, which we’re seeing across the industry, as well as in our customer and partner engagements.
Also, the interest in VR/AR that talks about the metaverse have sparked present Immersion with potential new customers, as devices with haptic feedback would be more immersive than ones without the function.
Financials
IMMR has intriguing financials – the company’s revenues have been on a slow and a turbulent decline:
Immersion's Revenues (Seeking Alpha)
Although declining revenues are alarming, Immersion Corporation has been able to keep its EBIT-margins over 60 percent in recent history. This has been achieved by cutting the company’s R&D department down to a fraction. Immersion also has their gross margin around 100% - their cost structure is very light.
This light cost structure is demonstrated by Immersion’s operating costs, which have been on a sharp downfall – in 2017 the company had SG&A and R&D combined at almost $67 million, with the same number standing at around $14 million for the company’s trailing twelve months. For a technology company, the company also has very few open job listings – in fact, only one, which is for a position as a paralegal:
Immersion's Job Openings (Immersion's Website)
The company’s last earnings call was held on Q2 2021, further demonstrating the company’s immensely tight cost control.
I believe the firm's heavy cost control possibly signals a limited availability to grow revenues or expand its offering, as the company tries to make maximum cash flows with their current offering. Research and development could continue to modify the technology into new verticals, but the company has decided to pursue the current path. This decision was made years ago, though - VR/AR and automotive verticals could signal new revenue streams, although they haven't seemed to affect the company's revenues too much yet.
Immersion has a heavy balance sheet as it holds $27 million in c ash and $121 million in short-term investments that produce a few percent annually with current interest rates. The company also doesn’t have any interest-bearing debts, creating more than a solid foundation for the company. As the company has a market value of $233 million, most of the entire company’s value is in its balance sheet.
Lawsuits
As Immersion Corporation’s main assets are its patents, the company actively fights against infringements of these patents. Mainly, the company has lawsuits against Meta Platforms (META) for its AR/VR electronics that infringe six of IMMR’s patents, according to the company. The company also recently filed a lawsuit against Valve Corporation for infringements regarding Valve’s Steam Deck and Valve Index. The lawsuit claims that Valve has infringed seven of Immersion’s patents. Moreover, the company has other smaller lawsuits – for example in their Q1 release , Immersion communicated the following lawsuit against Xiaomi:
In March, we announced patent infringement lawsuits against several companies of the Xiaomi-Group in Germany, France and India. The complaints allege that Xiaomi’s smartphones, including the Xiaomi 12, infringe Immersion’s patents that cover various uses of haptic effects in connection with such smartphones. Immersion is seeking injunctions that would allow Immersion to prohibit Xiaomi from selling the infringing smartphones in Germany, France and India, as well as costs and damages as compensation for such infringement.
The fact that Immersion currently has numerous lawsuits about its patents seems concerning to investors, as the patents aren’t respected by other companies. A negative outcome from a significant case like the Meta lawsuit could dissuade potential customers from paying Immersion for its patents. Also, as lawsuits against established firms like Meta are costly, the ongoing cases bleed Immersion’s cash flows.
On the other hand, if these lawsuits end in Immersion’s favor, other companies could be forced to either abandon their haptic features or to use Immersion’s license, presenting the company with a huge upside in new customers. This is why I believe Immersion’s lawsuits’ outcomes are really important for the company’s future.
Valuation
Immersion currently has a trailing price-to-earnings ratio of 7.0, which seems quite low to me especially considering the company’s balance sheet. Because of declining revenues, though, the valuation should be measured more thoroughly. I constructed a Discounted cash flow model, which represents my assumptions of the company:
Immersion DCF Model (Author's Calculation)
For the assumptions, I’m expecting the company to have slightly declining revenues in 2023 to 2025. From 2026 onwards, I’m assuming a 0% growth, corresponding to negative growth in real terms. I expect the margins to only compress a tiny amount, as Immersion has a light business model. The DCF model gives Immersion Corporation a fair value of $8.7, a 22% upside from the stock’s current price of $7.16.
For the cost of capital I have 13.2%, an exceptionally high amount. This is because the company doesn’t leverage any debt for its financing, creating the following Capital asset pricing model:
CAPM (Author's Calculation)
For the risk-free rate I’m using the United States’ 10-year bond yield, US10Y . Equity Risk Premium is an estimate made by Professor Aswath Damodaran for the United States in his latest report . The company’s historical beta is 1.41 according to Yahoo Finance . Finally, as the company’s shares are quite illiquid, I’m inputting a 0.75 percent increase in the expected rate of return, crafting the total Cost of Equity as well as total Cost of Capital at 13.2%.
Insider buys
The company’s board of directors have been buying up the stock especially last autumn:
IMMR Insider Buys (Tikr)
I believe this adds security to the investment, as the company’s insiders are confident in Immersion Corporation’s ability to create revenues in the future. Also, in my opinion this could mean that a favorable decision is more likely in Immersion’s lawsuits.
Closing remarks
Immersion Corporation is an intriguing company with many possible outcomes. The company relies on its ability to sell its patents to customers, which is now endangered by companies using similar technologies. The results of Immersion's lawsuits will in my opinion determine better, whether the company is worth investing into. With a currently cheap valuation, and a stacked balance sheet, the company could be a fruitful investment if revenues don’t decline sharply. Without proof of current revenues level's sustainability, and the mentioned risk of current lawsuits, I think the stock is worthy of a hold rating.
For further details see:
Immersion's Patents Need To Prove Their Validity