To The Moon

For the week, the major averages were mixed, with the blue-chip Dow posting its third losing week in four, while the S&P and Nasdaq notched their seventh up week in the last eight, buoyed by the recent rally in tech. The best-performing concepts are technology hardware, Storage & Peripherals.

Considering the different perceptions of the stock, this time TigerPicks chose $Immersion(IMMR)$ to have a fundamental highlight to help users understand it better.

$Immersion(IMMR)$

Immersion Corporation, together with its subsidiaries, engages in the creation, design, development, and licensing of haptic technologies that allow people to use their sense of touch to engage with and experience various digital products in North America, Europe, and Asia.

The company provides technology, patent, and combined licenses. It serves markets, including mobility, gaming, automotive, virtual and augmented reality, and wearables, as well as residential, commercial, and industrial Internet of Things.

Business Model

Immersion is in the business of haptics: anything that uses human touch as a means of interacting with or using technology. A touch screen is a classic example. Revenue is primarily generated through licenses and royalties on their portfolio of haptic patents.

A small portion is a fixed license, while most revenue comes from per-unit royalties. This means revenue can be very seasonal, often higher in the latter half of the year because of holiday sales.

This is particularly because almost a third of revenue comes from patents related to gaming and virtual reality (2023 Form 10K, pg. 7). Seen above, we also see that customers in the mobile device and automotive industries are a key source of revenue.

Most of these customers from outside the United States, a majority being from Japan and Korea. Some of this concentration can be explained by the following:

While they have declined to identify these customers, a majority of their revenue often comes from a single customer. Major customers they identify in their 10K include: $Nintendo Co., Ltd.(NTDOY)$ $Sony(SONY)$ $Microsoft(MSFT)$. Additionally, they noted that a dispute with $Meta Platforms, Inc.(META)$ had been settled this year (pg. 32), that will provide the $17.5M in revenue, net of legal expenses.

Seen above, the expenses are relatively light, with most of them being general and administrative. Regarding these expenses, the company reported (pg. 40):

Our general and administrative expenses primarily consisted of employee compensation and benefits including stock-based compensation; legal other professional fees; external legal costs for patents; office expense; travel; and allocated facilities costs.

Cash Flow Statement (2023 Form 10K)

Capital expenses are almost zero, suggesting that this business is very cash-generative. Yet, note the detail on derivative transactions, which they detail as (pg. 55):

We invest in derivatives that are not designated as hedging instruments and which consist of call and put options. When we sell call or put options, the premium received is reported as Other current liabilities on our Consolidated Balance Sheets. When we purchase put or call options, the premium paid is reported as Investments-current on our Consolidated Balance Sheets.

A significant portion of the cash flow appears to be used on non-hedge derivatives. While the 10K does note that their stock repurchase program allows the use of derivatives to effect a buyback, it's not clear anywhere in that document if these are options contracts specific to IMMR or other assets.

In summary, with such light operation, the business seems to be one of generating cash flow from their portfolio of patents, while also using their extra capital to form a portfolio of investments. Let's review that more closely.

Investments

For a non-financial company, Immersion has an interesting balance sheet. Take a look at these assets.

In particular, we see $56M in cash (with no long-term debt), and $137M in investments. What exactly is in this portfolio?

It appears to be a mixture of stocks, Treasuries, and corporate bonds. The derivatives, meanwhile, only account for $7.9m of the portfolio (pg. 60). In 2023, this portfolio produced $25M of interest income.

Seen above, the portfolio is where the real growth of the business has been over the past decade. Looking at Immersion, it almost feels like reading about a micro-cap insurance company.

The Future

There aren't many companies like Immersion, and so it has risks specific to them, which I'll go over now, along with some of the benefits.

Future Patents

As patents expire and technologies improve, Immersion will need to ensure that its portfolio keeps up to ensure future sales. As seen in the income statement, they seem to be spending almost nothing on R&D, and so it's an open question of how exactly they will do this.

Moreover, many of the customers they mentioned are the sort who can and do develop their own patents. Microsoft and Nintendo may not need Immersion at some point down the road. This casts a shadow on how long they can continue to generate free cash flow from this.

Distant Management

The company has not had an earnings call since 2021. There are also not many resources on the company's Investor Relations page. This suggests to me that management isn't particularly concerned with keeping its shareholders informed, which I find to be a potential risk.

Financial Health

In spite of these things, the company has $183M in tangible assets (most of which are liquid investments), almost no capex, and no debt. If it has a bad year, owners of IMMR are unlikely to get wiped out, so we do have some basis to do a valuation.

Valuation

To value this company, I will discount the next decade's worth of FCF and add it to the current tangible book value. I'll make the following assumptions:

• Baseline FCF of $25.9M

• No growth over the decade

$25.9M is the average FCF of the last three years, which I think accurately reflects the shape of the current company. I'm assuming no growth because the company doesn't seem to be investing or planning for that, with almost no capex of R&D, while dealing with big tech players who definitely invest in that.

For the whole company that gives an intrinsic value of $342M, which comes to about $10.86 per share with its 31.5M shares outstanding. This suggests it is undervalued.

I have not taken into account the impact of buybacks or dividends, as we don't have recent conversations with management (like earnings calls) where they can clarify or emphasize their strategy for capital allocation. Yet, if buybacks continue at these prices, this could enhance the return.

Conclusion

Immersion is an unusual company that lacks any major problems, but its current discount is likely explained by what may be an ephemeral business of licensing patents and just building up a portfolio of investments like an insurance company does with its float. Thus, while it's not the riskiest buy, no obvious catalyst exists to boost its growth.

To the extent that it is discounted, about as straightforwardly as a stock can be, it's a Buy, but long-term investors should be pay attention to how management will allocate capital going forward as well as any other crucial updates that may change the outlook.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 2 Wall Street analysts offering 12 month price targets for Immersion in the last 3 months. The average price target is $11.00 with a high forecast of $11.00 and a low forecast of $11.00. The average price target represents a 3.48% change from the last price of $10.63.

Resource:

https://seekingalpha.com/article/4683244-immersion-corporation-undervalued-on-paper-despite-lack-of-growth

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