Tiny sensors are slated to pack a big punch for investors in coming years.
Some of these sensors — one-tenth the size of a postage stamp — are already packed inside smart watches, smartphones and tablets. And the sensors perform key functions, like detecting images or sound or motion. They've also gotten smaller, cheaper and more powerful: fueling new technology innovations, like wearable electronics.
Even so, sensors are nothing new. They've been around for decades, said Tristan Gerra, senior research analyst for semiconductor components at Robert Baird. Sensors are already used in cars, machines and lamps.
As the number of devices rise, though, motion and image sensors will be the ones that matter most, said Gerra.
The number of tablets are slated to jump 78.9 percent globally from 2013 to 2017, according to IDC Research. And smartphones will see a 71.1 percent rise. These devices will pack even more sensors into them as they become ever smarter, such as programming gestures that can serve as pass codes.
"Today, people have two or three connected devices," said Andrew Uerkwitz, emerging services and technology analyst at Oppenheimer. "By 2020 that number will be 15 or 20." The number of sensors per device will also likely double.
Motion sensors, for example, are necessary ingredients in fitness bands. The sensors, which are only as big as a pen point, tilt a smartphone screen or connect with GPS. "If you believe that wearable technology will take off, sensors will be in the thick of it," explained Uerkwitz. "You need a whole host of them."
Wearable technology is also part of the even bigger future trend: the Internet of Everything, which depends heavily on sensors. A term coined by Cisco CEO John Chambers, the Internet of Everything is slated to become a $19 trillion market in the next few years as devices start to talk to each other. Cisco has already staked out the market.
"The Internet of Everything will turn the world into a smarter planet," said Tony Massimini, chief of technology at Semico Research. "Everything will be able to talk to each other over a global grid."
The only problem: These are early days for motion sensors. "So it's hard to invest in them right now," cautioned Uerkwitz. For now, California-based InvenSense, which is currently valued at $1.8 billion, is the only pure play that's publicly listed. "It's positioned as the industry leader," he added, "with its sensors, efficient power consumption and small size."
InvenSense sensors are already used in Google glasses and Samsung smart watches."InvenSense has been gaining market share," said Gerra, "and the technology is very difficult for any other company to replicate."
Not unnoticed, InvenSense (NYSE: INVN) stock has risen 107 percent in the past year, and it now has a lofty price earnings multiple of 76. So some analysts are calling the motion-sensor maker overvalued, while others disagree. "InvenSense's revenues will grow double-digit for several years," said Gerra. He points to the company's high gross margins and high-profile clients, like Samsung. "Plus, there are several emerging opportunities for the company," he added.
STMicroelectronics NV is another motion-sensor player. The Swiss company has a market capitalization of $7.96 billion but has been losing money the past few years. Yet the stock rose 19 percent over the past year. Motion sensors are only about one-quarter of STMicroelectronics' (NYSE: STM) revenues, said Uerkwitz. But the company is great at making cheap sensors, he added.
Use of image sensors is also expected to rise as they begin to appear on more smartphones and tablets.
Enter OmniVision Technologies (NASDAQ: OVTI), which has risen 39 percent in the past year. The small California-based company makes a 13-megapixel CameraChip sensor for smartphones and tablets. As demand increased, the camera phone market became the company's biggest revenue source in the first quarter of this year, according to Zacks Research. Consumers see better picture quality with these higher-quality sensors.
However, image sensors' strongest growth is probably five years from now, predicted Uerkwitz. "Every smartphone already has a camera," he explained. So he recommends sticking with fast-growing motion-sensor companies, like InvenSense, for now.
"The next big idea is that hardware will become like software," said Uerkwitz, "and chip manufacturers will do very well."