Immersion Stock: Contrarian Technology Play Set for Breakout

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Rally Could Launch Immersion Stock

Every time you touch the display on your smartphone, tablet, wearable, smartwatch, or computer, there is a good chance that the touch screen technology used to connect your fingers to the processor was developed by small-cap Immersion Corporation (NASDAQ:IMMR).

The company may be small, with a market cap of about $350.0 million, but the price appreciation for IMMR stock has been sizzling, up 67% year-to-date and easily beating the S&P 500 on a risk-adjusted alpha basis.

The stock traded at $12.85 on March 13, prior to coming back a bit, but it looks like the positive price action will continue as the company restructures and tries to turn things around.

On the chart, Immersion stock made an upside gap breakout at around $9.00, but it failed to hold above $12.00. If the stock can hold, we could see a retest of $12.00 toward $14.00–$15.00 in the next bull leg up.

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Chart courtesy of StockCharts.com

We all know about the increasing demand for advanced touchscreen technologies as applications become more complex. Immersion Corporation’s proprietary “TouchSense” solution enables users to fully experience the sense of touch by making it feel more realistic.

While the touch technology is found on billions of devices, the challenge for Immersion has been its weak fundamentals and lack of consistency.

To deal with this, the company is in the process of a major restructuring to strengthen its focus and efficiency. The fact that its profitability ratios are negative—and its return on assets and equity are also negative—indicates that there are problems.

Cost control will be critical, as will the need to improve operational execution.

Meanwhile, the company is looking to expand into the high-growth gaming and virtual reality (VR) and augmented reality (AR) markets.

The Contrarian Situation with IMMR Stock

The current underlying fundamentals are weak, but there is some optimism for turning things around. Immersion Corporation has recorded two consecutive years of revenue contraction, but the current year is expected to show a massive rebound.

Year Revenues ($ Millions)
2013 $47.47
2014 $52.94
2015 $63.39
2016 $57.09
2017 $35.01

Revenues are estimated to ramp up by 149% to $87.2 million, followed by 3.2% to $90.0 million in 2019. (Source: “Immersion Corporation (IMMR),” Yahoo! Finance, last accessed April 12, 2018.)

The rally in IMMR stock is reflecting the expected growth this year.

The earnings picture has been even more dismal, with deteriorating earnings results from 2014 to 2017.

Year Earnings Growth
2014 -89.78%
2015 -28.57%
2016 -1,491.90%
2017 -11.52%

But there is some hope, with the company predicted to stage a major swing to profitability this year. Immersion Corporation is expected to earn $1.37 per diluted share this year, compared to a loss of $0.98 per diluted share in 2017.

The earnings per share (EPS) trend has been rising over the past 90 days for 2018 and 2019, which supports the move of Immersion stock.

A key variable to monitor is free cash flow (FCF), which has been negative in two of the past five years, including 2017. Based on its focus on cost control, Immersion Corporation could manufacture a positive FCF in 2018 or 2019.

Year Cash Flow ($ Millions)
2013 $20.92
2014 -$0.49
2015 $5.62
2016 $21.7
2017 -$43.95

Analyst Take

The market is betting on Immersion Corporation to turn things around. We will get an early indication in the first- and second-quarter reports.

Assuming that the company can deliver on its estimates, its forward multiple of 8.8-times and its price/earnings to growth (PEG) ratio of 0.56 suggest that a higher price for IMMR stock is realistic.