InvenSense Inc. (INVN), the San Jose, Calif.-based semiconductor company that manufactures wearable technology for products such as fitness trackers, smartphones, watches and new augmented- and virtual-reality devices, is a polarizing pick for tech investors.

On the one hand, investors see growth opportunities for InvenSense in the emerging wearable and augmented-reality industries. Yet, factors such as the wearable tech company’s dependence on key costumers such as Apple Inc. (AAPL) and the continued decline of the smartphone market, may cause the stock to plummet. (Also, read: Investing in Virtual Reality: The Case for InvenSense Inc.)

 Lack of Customer Diversification

While InvenSense stock has picked up significantly since its 52-week low in May, its current trading price of $7.25 as of Wednesday morning reflects an approximate 25% decline year-to-date.

Much of InvenSense stock’s volatility derives from its tie to key customers Apple and Samsung, which comprised 40% and 16% of the wearable tech company’s 2016 revenues, respectively. In fiscal Q1 2017, Apple’s portion of InvenSense’s total revenues increased to 46%, while Samsung’s share declined to less than 10%. This lack of customer diversification puts the company at risk, as seen recently when rival STMicroelectronics N.V.’s (STM) beat out InvenSense to supply Apple Watch sensors.

 

In light of this risk, the semiconductor manufacturer is working to diversify and improve margins, as revenues from component sales in its mobile segment dropped to 63% of total revenues in fiscal Q1 2017, down from 72% over the same period last year. InvenSense investors are betting on growing revenues from component sales in segments such as the Internet of Things (IoT), which now account for 25% of revenue, up from 12% in Q1 2016.

Wearable Tech Focuses on High-Growth Industries

InvenSense’s shift to high-growth markets is also a smart play in response to a global decline in smartphone demand. International Data Corp. reports flat 0.2% year-over-year (YOY) growth in smartphone shipments in Q1 2016, compared to 16.7% growth the same period last year. This YOY growth, which represents the smallest on record, is attributed to “saturation in developed markets” and coinciding declines from Apple and Samsung. (See also: 2 Cheap Wearable Technology Stocks.)

Amidst its dependency on two core customers that receive over half of the company's semiconductor business and a risky tie up with an uncertain smartphone market, InvenSense has pledged to venture into new projects. Recent investments include developing virtual- and augmented-reality headsets, drones, cars and IoT devices. When it comes to InvenSense stock, investors must decide whether the company can swiftly shift its focus from core production of semiconductors for Apple and Samsung to cut ahead of competition in new booming technology sectors.

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