Immersion Stock: A Value Player in a Unique Market Segment (NASDAQ:IMMR)

Trying to maintain a diversified portfolio sometimes means thinking outside the box. This is especially true when you are trying to focus your portfolio on a specific strategy, such as value stocks. If you are not careful, it can easily happen that too exposed to a single industry and very vulnerable to market changes.

Today we look at Immersion Corp (NASDAQ:IMMR), a company that uses its patents and know-how to license haptic technology. We’ll look at what they offer as a value play and try to understand the unique business they’re in.

Immerse yourself in the matter

As mentioned above, Immersion has nearly 1,000 patents granted or pending worldwide in the haptics market, in which they are a significant player. They license the technology to various technology companies for use in mobility, gaming and automotive.

While Immersion works to saturate existing markets, the company mentions in its 10-K report that it hopes to expand licensing opportunities in new markets, from virtual reality and wearables to the Internet of Things.

Mobile is the company’s largest segment, with Samsung generating a significant portion of licensing revenue. However, over the years, the business has expanded into other segments. In 2022, mobile accounted for more than 60% of total revenue, now it’s only 41%, but still a strong frontrunner.

As a leading player in the haptics industry, Immersion is committed to playing a role in the adoption of industry standards while driving the adoption of haptics technology in more and more markets.

What is haptics anyway?

Haptic devices use the sense of touch to provide force feedback to the end user. Devices can use sensors to detect how much force is being applied by the user and provide them with information about the touch.

An example of haptic technology is the rumble of controllers such as joysticks in games and the vibration feedback of mobile phones.

Haptic feedback has been around in technology since the mid-1970s, while rumble packs and force feedback joysticks emerged in the 1990s and brought the technology into home use.

Immersion: The balance

click to enlarge

(Source: latest SEC 10-Q)

For a relatively small company, Immersion has a solid balance sheet and strong cash position. This gives the company a lot of flexibility and allows it to acquire additional patents and businesses.

Given current equity, we have a price-to-book ratio of 1.53. That’s a good value for money that doesn’t require too much of a premium for a company that has nearly $3 per share in cash.

The risks

Licensing and generating royalties is a relatively simple way to do business, but immersion comes with some industry-related risks.

Licensing agreements are a big problem for the bottom line. To stay in business, they need to renew licensing agreements and enter into new ones. If they can do that, they’re in good shape, but since that’s where most of their revenue comes from, failing to get good licensing agreements in place can be costly.

The biggest licensing deals are those with Samsung Electronics (OTCPK:SSNLF). Good business relations with them are crucial. Fortunately, the license was renewed in May, putting Immersion in a more secure position.

Royalties from technology companies also mean that Immersion is inevitably responsive to the business adequacy of those companies. Concerns about component shortages could be a problem in the future because if this reduces the availability and sales of products using Immersion technology, the royalties earned will also decrease.

For value stocks, profitability is paramount, and anything that threatens profitability over the long term poses a risk to the company.

Profit and loss account

click to enlarge

(Source: SEC’s 10-K)

Total revenue is relatively stable, but we don’t see stable growth. The first quarter of 2024 brought a lot of revenue, but you can’t really expect that level of revenue to be reached again in the future, at least not in a reliable way.

Profitability was strong, especially for a company with a stock price below $10. Immersion is estimated to earn $1.13 per share in 2024 on revenue of $69.1 million and 87 cents in 2025 on revenue of $40 million.

The P/E ratio for Immersion is 9.32, a very cheap offer. The forward P/E ratio is even better at 8.58. As long as they can maintain this level of profitability, it would be fair to consider the company to be quite cheap on an earnings basis.

A good sign that they will maintain their profitability is the above estimates. Another is that the company pays a modest dividend that will increase from 3¢ per quarter in 2023 to 4.5¢ per quarter in 2024. The existing cash balance can easily cover this dividend payout and would hopefully support further growth in the coming years.

Diploma

Immersion is trading at a reasonable premium to the $6-$7 range where the stock typically trades. At that level, the stock would certainly be more buyable, but that’s not to say the small premium to book value and P/E doesn’t make the stock attractive, as it currently trades at around $10 per share.

There aren’t many comparable companies in the haptic technology licensing market to Immersion. If you’re looking to invest in technology without focusing too much on one market segment, Immersion is a good choice.

When investing in the company, one should keep a close eye on the industry and see if the company has the ability to maintain profitability. I would also keep a close eye on the dividend payout because as I said, there is a lot of room for growth and that would be a great way to return value to shareholders.