Technology stock

Immersion: A High-Risk Haptic Tech Stock (NASDAQ: IMMR)

Passionate photographer. Travel the world to capture moments and beautiful photos. User Sony Alpha/iStock editorial via Getty Images

Investment thesis

Immersion society (NASDAQ: IMMR) (also IMMR from now on) splits people in half. According to some investors, they strongly believe in its strong future or are very skeptical due to its many problems and mismanagement. Immersion Corporation is the market leader in haptic technology, a rapidly growing industry, and it appears to have well-protected intellectual property. Still, the stock is down nearly 33% in the past six months.

We have tried to delve into the many issues of the IRMM and assess the stock. Our valuation is not unfavorable to Immersion, but it does highlight its negative margin issues. We believe that with better management, this stock could once again reach $8 to $9 per share. We consider the stock to be very high risk given its current situation.

Immersion Corp: The market leader

IMMR creates, designs, develops and licenses sensory technology, known as haptic technology, used in games to improve the experience and the mobile and automotive industry. Haptic technology gives feedback through vibrations, forces and movements. It’s like 3D but for the touch. In 2020, the mobile market represented 69% of Immersion’s turnover, the automotive market 15%, console and PC games 15%, and other markets, such as medical and adult, for an intangible part. The haptics market is expected to grow at a CAGR of 14.5% from 2021 to 2027, with the automotive market being a significant contributor to such growth rate. IMMR expected double-digit percentage growth in revenue from 2020 to 2021 in the automotive and gaming segments and was on track in the second quarter of 2021.

IMMR has achieved huge success with its haptic technology in the PlayStation 5’s DualSense controller, which has sold over 10 million units, despite chip shortages and logistical issues.

IMMR’s share of the growing automotive market for haptic technology is uncertain. Development processes can take more than four years, but still hold an uncertain outcome for IRMM. They cannot know if its technologies will be used in the final product and the number of units sold, which makes the royalties collected very uncertain.

Evaluation

We have chosen to value Immersion based on peer multiples because revenues, expenses and net income have been extremely volatile over the past few years.

IMMR has had high operating expenses over the past few years and a volatile operating margin ranging between -130% and 48% since 2014. This is reflected in our valuation multiples as Immersion appears to be undervalued in terms of EV/income. Non-GAAP operating expenses are not expected to fluctuate as much in the future, but remain within the $17-19 million range. Immersion could reach valuations closer to those given by EV/income multiples with better margins. During IMMR’s recent earnings call, management said it expects sustained profitability going forward.

Using the peers’ average EV/earnings, the implied stock price is around $9.5, or around 80% above the market price. We believe, however, that price levels of $8-$9 are achievable following a change in direction.

Source: MOAT investment

Issues/risks

Despite the bright future of haptic technology, Immersion seems to have a few issues to overcome. Many investors are very unhappy with the management because it lacks communication and investor relations management. Midway through the Q3 2021 earnings release, an earnings report was released, but no earnings call was held, providing investors with no opportunity to air their questions and concerns. The second quarter 2021 earnings call and report was also criticized for not offering much color to Immersion’s current situation.

On November 3, 2020, Ramzi Haidamus stepped down as CEO after a short tenure of less than two years. Upon his departure, Jared Smith, Vice President of Global Sales, served as interim CEO until August 30, 2021, when Francis Jose was named CEO. He had been promoted just over three months earlier to general counsel and senior vice president of intellectual property licensing and legal affairs. The choice to promote Jose to CEO seems strategic given IMMR’s litigation issues, which will be discussed later.

Management is issuing shares to raise capital, but no information is given on the reasons, but in the second quarter earnings call, mergers and acquisitions were ruled out as one of the reasons. Cash accumulation may be necessary to cover legal costs.

In addition to management issues, the board is under investigation for potential breach of fiduciary duties by Purcell Julie & Lefkowitz LLP, a law firm. Management and directors do not seem to have a positive view of the company’s future, as insider trading shows them that they are selling shares. In November 2021, director William Martin and chief financial officer Aaron Akerman sold shares at prices between $6.76 and $7.20, while director Eric Singer bought shares at $5.21. William Martin sold new sales in January 2022 at a lower price of $5.75. He sold most of his shares and went from over 2 million shares to just over 32,000.

Automatically generated table description

Open insider

Source: openinside.com

IMMR’s involvement in litigation results in cash being tied up as contingencies. In its third-quarter report, Immersion has a long-term deposit of $6.9 million that should be repaid by Samsung regarding a matter with Korean tax authorities. Immersion also finds itself similar to Korean IRS and LG Electronics. In this case, the deposit is $5 million. A decision in the first case is expected from the Korean administrative court by February 2022. As for the case with LG, IMMR expects to be reimbursed by LGE in the event of a favorable outcome.

IMMR filed for arbitration against Marquardt GmbH, claiming they owe royalty payments; the amount is to be determined. Marquardt filed a counterclaim for $138,000.

Immersion’s core business is based on its ability to protect its intellectual property. The duration of its patents is on average 20 years. Immersion reported having 1,700 granted or pending patents in its Q3 2021 report; in the 2020 10-K report, the number is said to be over 1,900. In its efforts to protect its intellectual property, Immersion may take legal action against companies without a license to use its intellectual property. Examples of this were seen as Immersion sued Microsoft (NASDAQ: MSFT) and Sony (NYSE:SONY), where they eventually reached an agreement resulting in payments to Immersion.

In the same vein, Immersion being very dependent on its patents and technology, innovation is essential. However, research and development expenditure was down and in 2020 represented less than half of that of 2014.

Conclusion

With the bright future of haptic technology, the future of IMMR, the leader in haptic technology, is set to be cut out; However, this is not the case. Due to poor management of investor relations, management issues and litigation, IMMR appears to be in bad shape and many investors are questioning its survival. Protection of patents and other intellectual property is essential to its success, as is continuous innovation as technology advances and patents expire. Despite this, IRMM’s R&D expenditures have dropped significantly.

Even though our valuation shows upside potential, a purchase should be made with caution. As we have seen, the future of IRMM is uncertain. Many investors are speculating on what management is planning. Our opinion is that Immersion is too risky and not worth investing in with its current management. With a change in leadership and better investor relations communication, some value could be unlocked.