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Synaptics (SYNA) has been riding the smartphone wave successfully as its gain of 33% so far this year shows. Counting Samsung as a customer surely helps and Synaptics is also counting on the rapid growth of the Chinese smartphone market to drive growth.

The company's recently declared fourth-quarter results gave shareholders enough reasons to cheer as Synaptics easily surpassed consensus estimates and its prospects also look good.

Let's take a look at the factors which contributed to its growth and what can lead Synaptics higher in the future.

A look at the quarter

It is well-known that the smartphone market has been growing at a brisk pace. The number of mobile devices in the world is expected to outnumber the global population by the end of the year. On the other hand, it goes without saying that sales of PCs have been falling.

Synaptics was smart enough in dealing with this paradigm shift in computing by moving into the mobile computing space and winning new customers. The company saw a ramp up of all its new designs across multiple customers. One such win was the "Finger Hover" for which it worked closely with Samsung.

All these efforts resulted in a 186% jump in mobile revenue, which was dragged down by a decline of 26% in the PC segment.

As a result of good strategies and innovation, the company notched a 67% increase in revenue to $230.2 million in the fourth quarter from the prior year period, beating analysts' expectations of $221 million.

On the earnings side, Synaptics saw its net income triple to $45.3 million as compared to $12.3 million in the preceding year, easily beating analysts' estimates. The company is virtually in every high-end smartphone with the exception of Apple at this juncture.

What does the future hold?

The market for the sub-$200 smartphone is estimated to be on the rise and is expected to reach 750 million units from now to 2018. Synaptics is looking to make the most of this growth in the sales of smartphones and BRIC nations would be the driving force behind the expansion of this segment.

The market in China remains a key area of growth for the company and it is well-positioned in the second tier of the market as it works closely with all major OEMs. Synaptics is also working on cutting-edge technologies such as the single layer on-cell solution for addressing the entry level market.

On the tablet front, Synaptics sees a booming market with its solutions shipping in Samsung, Sony, Acer, and Lenovo. The design win pipeline remains very strong and the company is planning to announce many new wins based on new flagship designs in the coming months.

Synaptics has also launched a ClearPad solution for large touchscreens and it expects to see this market segment grow, as the PC market hopefully witnesses an uptick due to aging hardware that would need replacement.

Synaptics is well-positioned to capitalize on all opportunities that come in the mobile segment, as well as the broader touch-screen market and drive sustainable growth going forward.

Resilient rivals -- Atmel and Cypress

The presence of a few peers will undoubtedly make it difficult for Synaptics to experience steady growth going forward, but the company seems equipped to face them.

Atmel (ATML) is one of the competitors of Synaptics in the touchscreen business, catering to the mobile computing and the touch-enabled PC/notebook segments. However, it has been witnessing a rollercoaster ride as far as performance is concerned. In the last reported quarter, it saw a 6% year-over-year decline in revenue and earnings per share also decreased from $0.08 to $0.06.

The company has been banking on the success of touch-based Windows 8 OS which hasn't been a raging success, while Windows RT has also been reported to be a failure. Windows Surface Pro also hasn't seen very good sales numbers and Microsoft has been slashing the price of the tablet.

Atmel's wins in the PC market might lead it to perform better in the future. Atmel has seen wins from Sony, Asus and most importantly Lenovo. Lenovo, as we know, is the market leader in the notebook PC segment currently, and this is an important tie-up for Atmel, especially for its maXTouch technology-based offerings.

Cypress Semiconductor (CY) is another player in the same segment as Synaptics. It is a leader in USB controllers that enhance connectivity and performance in a wide range of consumer and industrial products.

Cypress released its second-quarter results in July, which were disappointing as its revenue plummeted 4% to $193.5 million while earnings per share also dipped to $0.14, but beat the consensus estimate of $0.07 handsomely.

To recover from this decline in margins and perform better in the future, Cypress recently announced CapSense Express, a capacitive touch-sensing controller, which is optimized to do away with mechanical buttons in the front panel for consumer electronic devices, portable medical devices, gaming devices, and home automation systems.

Also, Cypress recently released a new low-power device, which supports up to ten buttons and drives up to ten LEDs with fully configurable LED effects and is expected to benefit the company in the future.

Management expects that these new products will help the company perform well in the future and that it had attained bottom in the previous quarter. These products might also pose a threat to Synaptics' business as well and push up competition in the space.

Conclusion

Synaptics might yield good returns in the future, primarily because of the fact that it is trying to make the most out of the smartphone boom. Rapid growth of budget smartphones in the emerging markets and the presence of a major client such as Samsung are strengths of the company. The good part is that investors won't be paying too much for it as it is trading at 13.6 times trailing earnings and is profitable, while its two peers discussed reported losses.

Source: Profit From The World's Biggest Smartphone Market With Synaptics