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Immersion Corp (NASDAQ:IMMR) is scheduled to report its Q2 2024 earnings on August 8th, so I wanted to consider whether now would be a good time to start buying the stock. The company’s revenue streams are very hard to predict, but the company has solid financials and some interesting bets on other companies’ recovery, so it’s intriguing for now. However, I’m staying on the sidelines as I want to see how the company’s revenue trends over the next few quarters.
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IMMR has been around for many years, but it has only become more popular in the last few years. The company designs its haptic feed technology and licenses it to major technology companies, including Sony (SONY), Microsoft (MSFT), Nintendo (OTCPK:NTDOY), and Samsung (OTCPK:SSNLF). Sony is using IMMR’s technology in its new DualSense PS5 controller. Nintendo is doing the same. It’s likely that many mobile companies are licensing IMMR’s IP to provide feedback on the various touches and strokes that a touchscreen can provide. It’s also being used to advance AR/VR headsets, such as Meta’s (META) Quest headset. I think the future is bright for such technology and there will be plenty of opportunities for further experimentation and implementation. IMMR should be at the top of the innovation ladder.
A quick rundown of financial performance
IMMR’s revenues have been on quite a rollercoaster ride lately. What I don’t like about the chart below is that revenues have been flat for the past 6 years or so. At the end of fiscal 2017, the company had a $71 million boost from one customer in its fixed-fee license revenue business. This was short-lived as it was a fixed fee and the company was unable to enter into any more such agreements with other customers, leading to a steep decline in revenues over the next few years. In the most recent quarter, Q1 2024, fixed-fee license revenues increased significantly due to a license agreement with Meta Platforms (META) for IMMR’s haptic technology after the two companies settled a lawsuit. While IMMR appears to have won the lawsuit, we do not expect this kind of top-line performance to continue going forward.
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In terms of margins, the company’s business model is based on haptic intellectual property licenses and royalties, which means the company’s gross margins should be close to 100%, and that’s exactly what we’re seeing here. I think other margins like EBIT and net income are pretty good, but I think there’s still room for improvement. That said, the company’s margins are very healthy, so the issue here is the lack of consistency in revenue growth.
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With such healthy net profit margins, we can see that the company’s return on assets and return on equity are also very good. Currently, ROA is around 18% and ROE is around 24%, indicating that management is doing a good job of leveraging the company’s assets and shareholder equity. These numbers have remained fairly stable over the past five years, which is a good sign, but the company posted even better returns in 2014.
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When it comes to competitive advantage and moat, I look at the company’s return on total capital, or ROTC. Normally I would compare ROTC to peers, but the peers SA suggests are not comparable in my opinion. Also, many haptic technology companies such as Force Dimension (also not comparable), Ultraleap, Bhaptics, etc. are not publicly traded, so the information is very limited. I would default to only looking at the company’s ROTC, which was around 10%. This is the bare minimum I look for in a company that would let me know that the company has some competitive advantage and moat.
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Looking at the company’s financials, as of the most recent quarter, it had about $180 million in cash and short-term investments and generated over $25 million in net interest income in FY23, otherwise its performance would not have been as impressive. The company has no debt, which is a good thing. The company has a lot of flexibility in how it spends its cash, whether that be increasing dividends, returning value to shareholders through share buybacks, or further growth through increased R&D spending. I prefer the latter, as I value a long-term perspective. The company has not been spending heavily on R&D, which is a bit worrying. I would like to see the company take a more aggressive approach to stay ahead of the competition in haptics technology.
Overall, this business model is not very attractive to me. Some parts are predictable, some are unpredictable. For example, the company’s sales seem to increase significantly when a major manufacturer decides to renew its contract, but it does not disclose when this will happen or for how long. Also, the company’s litigation strategy seems to be working as it continues to win patent cases, which sometimes generates a decent amount of revenue, but in my opinion it is not sustainable at all. On the plus side, profit margins have been increasing over the past five years, which is a good development in that the management knows how to run the business efficiently.
Comments on the outlook
You mentioned the company’s business model, which is not very appealing to me. I want to see consistency, and the past few decades from 1996 to 2015 have been consistent, with a clear upward trend. Since then, the company’s revenue growth has been sporadic, which is not what I want to see in the long term. The company seems to be relying heavily on litigation revenue to boost revenue for a few years, or trying to get companies to sign contracts to use its technology, but I don’t think this is a partnership made in heaven. For example, the recent litigation settlement with Meta went in IMMR’s favor, but the company was made to sign a license agreement to use its technology. Don’t get me wrong. Meta and other big tech companies should not have used IMMR’s technology without a license in the first place. That’s why all of the past lawsuits went in favor of the smaller IMMR. However, there could have been a better way to start the partnership. But when it comes to a small company like IMMR and big tech companies like Sony, Microsoft, and Meta, I think the only way to get them to play by the rules is to threaten them with a lawsuit.
I would prefer stable and improving sales rather than occasional big increases. I think many investors would agree, as the company’s stock has been significantly underperforming over the past decade. A lack of growth is not in favor of a company like IMMR.
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I also think that the company’s products have become more popular over the last few years. When I bought my PS5 back a few years ago, the haptic feedback of the controller was like nothing I’d ever felt before, especially in the Astrobots Playroom tech demo, a full platform game that showed how different the controller was from its predecessor, the DualShock 4, which employed vibration motor technology. Going through a level set in the rain or on ice was unique, and I think that’s when people started to hear about “haptic feedback.” Sony has licensed IMMR’s IP, and so has Nintendo, meaning there is potential for revenue in the future. I don’t think these companies will develop technology that doesn’t infringe on IMMR’s IP. Given the potential for such technology to become widespread, I don’t think it’s far-fetched to think that a company like IMMR will be acquired by one of these big tech companies.
AR/VR sets are becoming more and more sophisticated, and the demand for more realistic touch sensors and haptics will be much higher than it was before the PS5. Haptic feedback, which we are all familiar with now – touching the screen of a smartphone and receiving a slight vibration to confirm the action – has also been around for quite some time and is becoming more advanced and complex with each new iteration. Just recently, the company announced that it has renewed its license agreement with Samsung Electronics, and its technology remains in high demand. I like the company’s revenue distribution: about 75% comes from Asia, and over 40% comes from mobile, wearables, and consumers in countries such as Japan (39%) and Korea (32%). It’s no secret that Asians play a key role in dominating the mobile gaming market, which boasts 1.3 billion gamers. Positioning in the region should be advantageous, but we have yet to see a stable revenue stream that will be a catalyst for the future. Perhaps that will change in the next few years as more and more consumer products are developed that take haptic feedback into account to improve the product experience. For now, we don’t see that happening.
The news that IMMR has invested in struggling Barnes & Noble Education (BNED) and now owns about 40% of the stock raises high hopes that IMMR will make a lot of money if BNED is successful in turning around. The company seems to be making a lot of money right now. The company paid about $50 million at $0.05 per share, but after BNED split its stock, it’s now $5 per share and BNED is hovering around $10 per share. That means they’ve easily made a 100% return on their investment.
Is IMMR a buy?
I will continue to keep an eye on this company. I think the company’s technology is great, and I hope more companies will develop products with this IP in mind. However, given the company’s unstable revenue growth, I will wait for now. I would like to see how the company’s licensing revenue develops in the future. I think there are many opportunities to grow revenue more steadily through further R&D efforts and IP licensing agreements with more companies. Unfortunately, the company has not invested much in R&D recently, but with a huge amount of cash, which is half of its market cap, I think there are many positives that could lead to further success for this company. The company’s revenue source is a strategic region, and I think an acquisition is not impossible. I would like to see how the company performs over the next few quarters before deciding whether to jump into this company.
While BNED still has no stake in the company’s operations, it could help IMMR in the long run if the company continues to hold shares and BNED recovers strongly, but I’m likely to remain on the sidelines for now.
