2024-01-19 13:07:50 ET
Summary
- Immersion Corporation develops haptic technology for gaming, mobility, automotive, and VR/AR, but has struggled to grow revenue.
- The company generates revenue mainly from licensing its patents, with key licensees including Samsung, Google, Sony, Microsoft, and Panasonic.
- Immersion's haptic technology aims to provide confirmation, realism, and rich communication in digital experiences, but revenue stagnation and reliance on lawsuits are concerns.
Investment Thesis
Immersion Corporation (IMMR) develops haptic technology that allows users to "feel" touch sensations in digital interactions. This technology seems promising for gaming, mobility, automotive, and emerging areas like VR/AR. However, despite the potential, Immersion has struggled to grow revenue over the past decade. I believe the over-reliance on a licensing model and patent lawsuits is concerning for long-term prospects. Still, new license deals, further patent litigation, and share buybacks provide short-term catalysts. Ultimately though, Immersion needs to focus more on true product innovation versus just financial engineering to drive sustainable growth. I rate Immersion a "Hold".
Company Overview
Immersion, founded in 1993, licenses software and patents related to haptic technology. Haptics use force, vibration, and motion to simulate feelings of touch in digital experiences. Immersion's technology is used in gaming controllers, mobile devices, wearables, autos, and VR/AR products. Key licensees include Samsung, Google (GOOG) (GOOGL), Sony (SONY), Microsoft (MSFT), and Panasonic.
Immersion holds over 1,200 haptics-related patents and its technology is used in over 3 billion devices. The company generates revenue mainly from fixed and per-unit royalties on licensed patents. As of the last full year , over 60% of revenue comes from mobility, 21% from gaming/VR, 13% auto, and 6% other areas.
Core Haptic Technology
Immersion's haptic technology aims to make digital experiences more "real" by incorporating the sense of touch. Key benefits include:
- Confirmation: Haptics provide confidence by simulating button clicks and scroll wheels through vibration. This boosts input speed and accuracy.
- Realism: Apps, games, and videos feel more immersive with recoil, explosions, etc. simulated by haptic vibrations.
- Rich Communication: Haptics enhance emotional connection in messaging/chat apps by creating a sense of "touching" the other user.
This technology seems useful for gaming, VR, mobility, autos, and emerging digital interfaces. More widespread haptic adoption could provide revenue growth opportunities for Immersion's licensing model.
Revenue Stagnation and Licensing Model
Despite the promise of haptics, Immersion has struggled to grow revenue, which has bounced between $30-$40 million over the past five years. The company generates 99% of revenue from royalties and licensing. This model has pros and cons. On the plus side, it provides strong margins without manufacturing costs. However, reliance on patent royalties makes revenue volatile based on license deal timing. Furthermore, expired patents and IP infringement dilute licensing power over time.
Ultimately, Immersion's business only succeeds if haptic technology is adopted widely in major hardware markets. Yet persistently flat/declining licensing revenue signals issues translating potential into reality.
Lawsuits Hold Outsize Impact
To defend its IP position, Immersion has undertaken lawsuits against major players like Microsoft, Sony, Apple (AAPL) and Meta (META). In several cases, Immersion reached undisclosed settlements . Currently, lawsuits seeking damages, royalties or injunctions remain ongoing against Meta , Valve , and Xiaomi.
Protecting patents makes complete sense, but I believe one could also argue that these lawsuits point to dependence on legal tactics versus distinct technology advantages to extract value. Moreover, they indicate patents may lack strong enough protection from infringement. Still, favorable rulings could provide upside catalysts through settlements, damages or renewed licensing deals. However, settlements won't be enough to drive sustainable growth on their own.
Financial Engineering Supports Stock Price
In recent years, Immersion has turned to financial engineering to try to prop up its stock price. Initiatives include a $50 million share repurchase program and a newly instituted quarterly dividend. In the latest quarter , Immersion bought back 1.3% of outstanding shares. These repurchases boost EPS and signal management sees shares as undervalued. Meanwhile, upcoming quarterly dividend payments aim to put a floor under the stock price during business uncertainty.
Strong Balance Sheet
These financial engineering maneuvers rely on Immersion's fortress-like balance sheet. The company holds over $150 million in cash and investments against minimal debt. This provides an ample buffer to fund buybacks and dividends for years without impacting operations. Still, the balance sheet strength mainly stems from a one-time litigation settlement windfall rather than sustainably profitable business performance in my view.
Valuation
Immersion stock trades at a TTM P/E of 5x. This seems inexpensive given the company's profitability, IP portfolio size, and strong cash position.
Immersion's dependence on unpredictable litigation and licensing models for revenue could be one reason for this undervaluation. Ultimately, the business needs to infuse the income statement with organic revenue growth versus court or non-recurring deal windfalls. Technology innovation needs to take priority over financial engineering to drive sustainable growth in my opinion.
Upside Catalysts
- Favorable rulings in current Meta, Valve and Xiaomi lawsuits leading to settlements, damages or renewed licensing deals.
- New patent licensing partnerships in mobility and emerging verticals like VR/AR and wearables.
- Continued effect from large share repurchase program and dividends putting a floor under the stock.
Downside Catalysts
- Unfavorable outcomes from ongoing lawsuits hurting licensing negotiating position.
- Key patent expirations not replaced by new IP diminishing licensing power over time.
- Revenue decline if slow haptic adoption deters new licensing deals.
- Reversal of financial engineering efforts like buybacks and dividends due to cash preservation needs.
Conclusion
Immersion's promising haptic technology has yet to translate into sustainable revenue growth. A significant reliance on temporary licenses and lawsuits is concerning. However, patent litigation and financial engineering provide short-term stock catalysts. Ultimately though, Immersion needs to refocus efforts on revitalizing top-line growth through R&D investment and technology innovation. In the meantime, I rate shares a "Hold."
For further details see:
Immersion: Undervalued, But More Than Just Financial Engineering Needed