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Apple Could Supercharge This Stock

It looks like InvenSense Inc. (Nasdaq: INVN) is getting ready to take a bite out of the Big Apple.

I'm talking, of course, about Apple Inc. (Nasdaq: AAPL).

The latest industry reports we're seeing say that the Sunnyvale, Calif.-based InvenSense may have landed a design win with Apple for an iPhone product that's destined for the China market.

As you know from our June 17 report "Double Your Money on This 'Mobile Wave' Stock," we were already very bullish on InvenSense, which makes gyroscopes and other motion sensors for smartphones, tablets and other devices.

So if this report turns out to be true, the upside could be stunning.

Here's the story.

On Friday, a number of sources said that Apple was looking to incorporate InvenSense's three-axis-gyro technology in a lower-cost iPhone that China Mobile Ltd. (NYSE ADR: CHL) will be selling in its home market. It was enough to send InvenSense shares up as much as 9% Friday; they finished 5.6% higher for the day.

InvenSense has been an Apple vendor before, having provided motion sensors for earlier products. But it has no exposure to the paradigm-changing iPhone and iPad maker right now – something that wasn't expected to change.

So Friday's report represented quite an about-face.

Maxim Group analyst Ashok Kumar said "there's [now] a better-than-even chance" that Apple will be incorporating InvenSense "Micro-Electro-Mechanical Systems" (MEMS) sensors into the upcoming, lower-cost iPhone. And Pacific Crest analyst John Vinh was even more upbeat.

If this report turns out to be true, it could be big for InvenSense.

Very big.

By some estimates, an iPhone win for InvenSense could be worth 40 cents a share in annual earnings. An iPad win would add another 20 cents a share to the bottom line.

To give you some perspective, consider that InvenSense is projected to earn 70 cents a share in the current fiscal year (which ends in March 2014) and 80 cents a share in fiscal 2015.

Since the company earned 59 cents in the just-completed fiscal year, the current estimates mean profit growth on a year-over-year basis would be 18.6% this year and 14.3% in fiscal 2015.

Bump those numbers up by 40 cents a share – taking them to $1.10 in fiscal 2014 and $1.20 in fiscal 2015 – and you're looking at an entirely different ballgame. For starters, you're talking about 68% growth on a year-over-year basis for the current year.

Even if the stock were to maintain its current valuation of 26 times earnings, with that elevated bottom line you'd be looking at a share price of $28.60 next year and $31.20 in 2015 – or between 86% and 103% above the late-Friday-afternoon price of $15.38 a share.

What's great about this report is that we already liked this stock a lot – even before discovering this potential for new business. And it helps to show why resident tech expert Michael Robinson had already believed that the consensus estimates for InvenSense's earnings were way too low.

Michael, the editor of our Radical Technology Profitsadvisory service, reiterated that belief when I spoke with him late Friday.

"Bill, based on my own analysis, I'm forecasting the company will increase earnings at an average annual rate of 25% over the next five years," Michael said. "That means the stock could double in less than three. And with the Mobile Wave providing a tailwind, there's plenty more potential upside from there."

Getting access to China's smartphone market would definitely help.

Smartphone sales in Mainland China are expected to exceed 300 million units this year – about a third of global shipments. And they're going to climb another 52% to reach 458 million in 2014, according to researcher IDC Group.

China has been wireless for a long time – cellphones were already widespread when I was posted there as a business journalist in the middle-to-late 1990s.  But the country had lagged a bit in terms of smartphone adoption.

That's changing.

IDC also projected that China – which last year leapfrogged the United States to become the world's largest smartphone market – would maintain that No. 1 ranking for at least the next four years. Smartphones already made up more than 58% of the 1 billion mobile subscribers. That figure will reach 78% by the end of this year and should surge to 90% by 2017, IDC predicted.

China represented 12% of Apple's revenue in the first quarter of this year, and its iPhone sales there doubled.

So an Apple iPhone design win by InvenSense could have a big impact on the latter company's bottom line.

And being involved with a lower-cost smartphone designed for an emerging market could turn out to have a strategic benefit for InvenSense, too. The reason: Apple has now turned its sights on India, which is just now starting to experience the ramp up in smartphone sales that China has already been experiencing – meaning it represents a massive opportunity for the iPhone.

The bottom line: If its technology is incorporated into Apple devices, then "InvenSense's earnings power will be significantly increased starting later this summer," Maxim's Kumar predicted.

Michael liked that assessment.

"InvenSense has a lot going in its favor: It's in a hot sector, is operationally excellent, has great fundamentals, and is a fast-grower," Michael said. "And what's great about it is that this is an assessment we made even before the reports surfaced on the potential for an Apple device design win. An announcement like that would just supercharge our estimates."

And your profits.

The consensus one-year target estimate on InvenSense is $16.77 (we use these just to give you some perspective). Expect to see the sell-siders start to ramp up their target prices – attracting the liquidity that will drive your holdings higher in price. As we often tell you, that's why we like to keep you at least one step ahead of the Wall Street crowd.

Molycorp Update: Staffers at the U.S. Securities and Exchange Commission (SEC) told Molycorp Inc. (NYSE: MCP) late Thursday that they'd completed their investigation of the accuracy of the rare-earth miner's public disclosures, and were recommending that no enforcement action be taken against the company.

After gaining as much as 50% after we recommended it last August, Molycorp shares are now down about 36% from where we'd initially recommended them – underscoring again why we recommend the use of "trailing stops." The one-year consensus target is $9.45.

[Editor's Note: Unless we specify otherwise, we recommend that investors employ a 25% "trailing stop" on all investments.]

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