Synaptics Has the Right Touch

Synaptics (SYNA) reported last night for the September 30 quarter, and judging by the reactions of analysts and after-market traders, they knocked the ball out of the park.

I've been following SYNA since January and am impressed by their prospects for growth in the relatively near-term (where "near-term" is defined more by the general market conditions than anything else).

Until Mr. Market gets over his hangover, I'm timid about committing new capital into just about anything, but last night's call made clear that when things stabilize, SYNA is a good bet. It's positioning itself to dominate a (relatively) strong sector, is operating very well, and has the makings of decent technicals to fuel a medium term price move.

Sector

Synaptics has been historically focused on the PC segment, making solutions for those helpful touchpads that just about every laptop has these days. While notebooks (and their soon to be hip "netbooks") are certainly looking forward to better growth than the overall PC sector, this isn't by itself a terriffic growth market.

Thankfully, Synaptics management had the foresight to invest in the "digital lifestyle" product segment (read: touchscreen smartphones, MP3 players, personal video players, etc...) which now represent over a quarter of revenue and greater than half of the company's new revenues over the last few quarters. I think it's fair to say that, where growth rate is concerned, SYNA is more closely tethered to the mobile/entertainment space than the PC.

Company

The company's management seems to be firing on all cylinders. Over the past few months we've been reminded of several of their design wins, particularly in the mobile space. Notably, they announced a win with the Research in Motion (RIMM) Storm (RIMM touchscreen), as well as Nokia's (NOK) touchscreen debut, and the first Android offering from HTC. This last bullet is the wildcard, but as the touchscreen OEM within the Open Handset Alliance, Synaptics could score if this platform takes off.

All of this recent success makes perfect sense. Synaptics is the market leading 3rd party vendor of touchscreen technology for the new wave of mobile and entertainment devices. Every Motorola (MOT), Nokia, Samsung, and LG that wants to take a shot at the iPhone (AAPL) will need to build or buy this technology, and I'm betting that they'd gladly throw money at a pre-developed solution if it cut 3 or 6 months off of their product launch date.

On last night's call, the management was generally very bullish with solid YoY growth, increased forecast range (the range was notably wide, however), and importantly a return to double digit net margins after a drop into the low single digits in the March and June quarters.

Stock (technicals)

The technical indicator that jumps out at me on SYNA is the short interest percentage. Since I've been tracking this stock from January 2008, the short interest as a percent of float climbed from high (17%) to crazy-about-to-fail-bond-insurer levels (50%) and seemed to have peaked in the July 15 reporting at 15.5M shares short (note, there was a 3:2 split in September, so bear that in mind if comparing short data that hasn't been restated). Since the July high, the short interest has dropped to a mere 40%, which has corresponded to (relative) strength for the stock. Since mid July, the shares have been basically flat, which in this market is a win...

Overall, I view the massive (and unwinding) short position as a very bullish indicator, though if a bear out there has a legitimate short case, I'd be grateful to hear it. Otherwise, this should fan the flames if we get a market rally and the remaining shorts duck and cover.

Conclusion

Overall, SYNA has an easily explained bull case: a solid product that's becoming critical for any mobile company looking to not get left behind in the iPhone segment, solid execution, and a whole lot of shorts that may be looking to get out of the way.

Disclosure: Author holds a long position in SYNA