Is Synaptics’ 26% Drop an Opportunity or a Red Flag?
Wall Street's obsession with short-term earnings guidance has pushed shares of Synaptics (NASDAQ: SYNA) down 26% in the last month to 52-week lows after the company's fourth-quarter results for fiscal 2017 failed to excite investors. The human solutions interface provider met estimates, but investors and analysts took issue with the guidance that was hurt by weak demand in the mobile business.
Savvy investors shouldn't get discouraged by the short-term troubles at Synaptics as the chipmaker is capable of tapping certain secular growth trends. Let's take a look.
TDDI will be a big catalyst
Synaptics believes that touch and display driver integration (TDDI) will be its next big opportunity in the smartphone space as the industry moves toward devices with end-to-end displays. The recent trend has been for smartphone OEMs (original equipment manufacturers) to deploy end-to-end displays to increase screen size without making the device bigger.
The likes of Xiaomi and Samsung have already taken this route, while Apple (NASDAQ: AAPL) could do the same with the next iPhone generation considering recent leaks and rumors. As this design philosophy goes mainstream, smartphone companies will be forced to integrate the fingerprint sensor into the screen itself.
Synaptics doesn't want to miss this gravy train. The company has already designed a workable chip that integrates the fingerprint sensor within the display, which is why it has been tipped to land a spot in the next iPhone. While a win at Apple would definitely be a big deal for the chipmaker, investors shouldn't be fixated on it as there's still a lot of opportunity outside of Cupertino.
TDDI chip demand will hit 100 million units this year, and then keep growing to more than 650 million units by 2022. This is a big opportunity for Synaptics as it is the only one among the three big companies making TDDI chips to have licensed its intellectual property to third-party providers.
Apple is the other company said to be developing such a solution, though it is likely that Cupertino will keep its technology. The third company, Japan Display, could face difficulty in selling its TDDI technology to panel makers. Japan Display makes display panels, so there's a chance that rival panel makers will refrain from using its technology, as pointed out by supply chain portal EBN.
Synaptics has a head-start in this space since it is already supplying its TDDI chips to key Chinese smartphone OEMs such as Huawei, OPPO, and Xiaomi, while Samsung has been using them in its mid-range smartphones. Such clients should be a big boon for Synaptics in the long run as they come out with more smartphones that require TDDI chips.
Buying its way into fast-growing markets
In June, Synaptics spent big money to buy its way into the consumer Internet of Things (IoT) space by acquiring audio and voice solutions provider Conexant Systems for $343 million, and $95 million to acquire Marvell Technology's multimedia business. The Conexant acquisition, in particular, could be a big deal for Synaptics as the company makes audio and voice solutions for Amazon's (NASDAQ: AMZN) Alexa platform.
Amazon and Conexant had tightened their relationship in May. The audio chip specialist announced a new microphone development chip that will help third-party hardware developers integrate Alexa into their devices at a low-cost and with a faster time to market. Amazon's Alexa is expected to command 70% of the voice-enabled speaker market this year, according to eMarketer, so Synaptics seems to have picked up the right company to attack this opportunity.
Synaptics believes that its latest acquisitions will add $2.8 billion to its addressable market, which could stand at $10.3 billion by the end of the decade. The company has a lot of room to grow its business as it generated just over $1.7 billion during the recently concluded fiscal year. As such, investors shouldn't get discouraged by just one weak quarter as Synaptics is sitting on big catalysts that could drive it higher in the long run.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has a disclosure policy.