Is Synaptics The Next Intel?

Mar. 4.14 | About: Synaptics Incorporated (SYNA)

Company Diagnostic Series Synaptics Inc. Overall Rating ★★★★★

Date 26/02/2014

Closing Price


Fundamental DCF Value


Relative Value


Technical Analysis


Growth & Dividends


Investment Returns


Debt Levels




Liquidity Ratios


Insider Transactions


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Synaptics (NASDAQ:SYNA) Incorporated develops, markets, and sells custom-designed human interface solutions for electronic devices and products primarily in China, South Korea, Taiwan, Japan, and the United States. The company offers its human interface solutions for mobile product applications, including smartphones and feature phones, tablets, large touchscreen applications, and global positioning devices, as well as mobile, handheld, wireless, and entertainment devices.


Fundamental DCF Value

We employ a multistage DCF model, which aims to deliver an approximation of the fair value of the share price. We used a short-term growth of 14.03 % decreasing to a long-term growth of 2% within the next 10 years in our Discount Cash Flow valuation model. Based on the DCF model, the fair market price of Synaptics Inc. stock is $69.20. The company is currently trading at $63.05. For this stock, we use a safety margin of a 10% discount*, meaning that we will be looking to buy the stock at levels around $62.28. Based on the relative analysis we issue a buy recommendation.

*the discount percentage may vary from one company to another as we take into consideration the company moat: the competitive advantage the company has over other companies, pricing power, brand name recognition etc.

Relative Value

In determining the company's fair share price using relative analysis, we took the price ratios of the industry average. The share estimate when averaging the different estimates is $131.12. We apply 25% discount on each estimated price. Based on the relative analysis we will be looking to purchase the stock below $98.34.Based on the relative analysis we issue a buy recommendation.





Current P/E Ratio


$ 61.35

$ 223.93

Price/Sales Ratio


$ 5.04

$ 112.89

Price/Book Value


$ 5.40

$ 90.96

Price/Cash Flow Ratio


$ 24.81

$ 96.72

Average Price

$ 131.12

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The company has exceptionally low P/E ratio which makes it an attractive buy candidate.

Technical Analysis

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The company trades above its 50-Simple Moving Average which is perceived as a bullish indicator. The company trades above its 200-Simple Moving Average which is perceived as a bullish indicator. The stock is trading close to its average volume levels. The Relative Strength Index is at 57.52 which indicates the stock is neither oversold nor overbought. However there are number of factors that indicate the stock may pull back from the recent highs:

1/ The short ratio 8.44 which is relatively high and may indicate be the stock is overvalued. The short float of 28.32% is just too high at the moment- the stock is heavily shorted probably because of the rapid growth it experienced over the last couple of years. It should be noted however that high short ratio may be viewed as a contrarian bullish indicator, especially if the days-to-cover are more than 8.

2/ As at 3rd March 2014 the MACD (12,26,9) is on the verge of generating a sell signal. We do think that MACD is a powerful indicator and there will be a healthy pull back. We expect the stock to fall to $57-$58 before reaching for new highs. This is close to 10% down from the current price.

3/ The Williams R% (14) indicator also shoes the stock is overbought and generates a sell signal.

Based on the technical analysis we can see a potential correction of 10% and initiate a short-term sell recommendation. We believe the pullback will be over in a month and the stock will re-bound to reach the next area of resistance at around $67.5-$68.

Product Diversification

As mentioned in the description above Synaptics specializes in supplying human interface solutions. According their annual report for 2013 the company develops and enhances interface technologies that enrich the user's experience in interacting with the user's mobile computing, communications, and entertainment devices:

· Clear Pad: Touchscreen products which consists of a thin sensor that is placed over the display panel of the device. This is the technology used for smartphones, tablets and some home products like the remote control. The technology provide full-time finger tracking and offers support for various sensor configurations.

· TouchPad: the product which replicates (and exceeds) the functionality of a mouse is a small touch-sensitive pad that senses position and movement of the fingers.

· ClickPad: a clickable design that eliminates the need for physical buttons.

· ForcePad a thinner version of the Click pad which introduces a new dimension in control through the addition of variable force sensitivity. The pad measure the force applied which enables more precise user interaction in operating system.

· Thintouch: this is a full keyboard solution that is 40% thinner than traditional keyboard solutions.

Overall the company offers a variety of products and these are all amazing technology products.

The touchscreen technology can be found everywhere nowadays: in smartphones and computers, navigation panels and home appliances. Who knows what the future holds for such technology? How about a touchscreen computer in your refrigerator that can order food for you? Or what about a complete touchscreen home that cleans, cooks, gives recipes, control the light, sound and the entertaining centre of the house?

Another area the company concentrates its resources is the fingerprint ID. With the purchase of the startup Validity last year Synaptics has entered the fast-growing fingerprint identification market. This acquisition shows that Synaptics are interested in ground-breaking technologies related to mobile devices.

With the constantly evolving technologies Synaptics can really take a step further and go beyond the touchscreen technology. One disadvantage of the whole smartphone and tablet industry is the limited possibilities of the keyboard. One can type a short text message on a phone but typing an article like this one will prove to be challenging. There are companies out there who work specifically on key board solutions and may be of interest to Synaptics. One of these companies is Tactus which specialize in creating a touchscreen cover lens that can enable physical on-screen buttons to appear when a keyboard is displayed on screen. Or how about a hologram keyboard or a monitor that project in front of you when you need to input information. To stretch things even further why concentrate only on "touch" to interact with the device. How about eye tracking technology? Will Synaptics be interested in entering this market? One company that works on such technology is Umoove.

It feels almost wrong only to mention such prospect technologies and not develop on that. The point is that acquiring startup companies may prove to be winning strategy for Synaptics. However, the competition in this area is fierce. There are many potential risks- for example technology requires many years and resources to develop but may quickly become obsolete.

Potential Risks

We will concentrate more on the specific risks for Synaptics and less on the general (high) risks associated with this industry.

1. The company may need to adapt quickly in order to remain competitive, which can lead to lower revenues and obsolete inventories. In fact the company transformed a significant portion of its products solutions in 2012- they had to abandon the full module solution to chip or tail solutions only which resulted in lower revenue per unit.

2. The company almost entirely depends on the human interface solutions. The sales has been volatile in the past and may remain that way.

3. We are particularly interested in this third risk factor- Samsung (OTC:SSNLF) accounted for 14% of the company's revenues in 2013. While it is good news that it is indeed Samsung their biggest customer this is also a potential risk. It will be interesting to see when those supply contracts are up for negotiation. However the company works with many of the big companies in the industry: Hewlett-Packard (NYSE:HPQ), HTC (OTC:HTCCY), Huawei, Samsung, Sharp (OTCPK:SHCAF), etc.

4. Synaptics offers their touchscreen solutions to the high-end smartphones and tablets. They have been questioned whether they can provide solutions to the cheaper devices. We are pleased to see that the management took these comments on board and is now introducing solutions to the second-tier products. One of the company's goals in 2014 is to target the full spectrum of the mobile market from value to premium smartphones.

In the subsequent sections below we concentrate on the financial analysis of Synaptics.

Financial Analysis


We are impressed by the growth by Synaptics Inc. over the last 5 years. Due to effective management and increased demand for the company's products the revenues has been increasing rapidly. Just during the last quarter Synaptics reported $205.8 million in revenues, an increase of 44% compared to $143 million for the second quarter last year. The net income increased 45% during the last quarter as compared to the relevant quarter a year ago. This company is a market leader in a rapidly growing industry. We believe they will continue to deliver strong revenues for many years to come. Synaptics really does tick all the right boxes. They have not only a clear competitive advantage over its competitors but also a solid management that steers the firm into the right direction. Projected net income growth is above our expectation which is really good sign that the company may have found new ways to increase revenues.

In terms of industry growth, Synaptic participates in several markets: the mobile smartphone market, the tablet and large touchscreen market, the notebook and desktop computer markets. The table below lists the industry outlook in those markets. All of these represent multi-billion dollar industry and with the exception of the desktop computer market, the growth prospects are high. As a market leader Synaptics is very well positioned to increase their market share in these growing industry.


Compounded Annual Growth 2013-2017

Mobile Smartphone Market


Table Market


Notebook PC Market


Desktop PC Market


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We believe that the company can capitalise on the growth of these evolving markets.

Synaptic can be the next Intel (NASDAQ:INTC): they are offering high quality product as a market leader in an industry that is poised to grow. Indeed Intel created the first microprocessor chip in 1971 but it was not until the rapid growth of the computer industry during the 90s when the company become a dominant supplier of microprocessors. Like Synaptics, Intel saw the enormous potential of the computer industry and invested heavily in the design and functionality of their product. Synaptics increased their R&D costs from $118 million to $164 million during the last twelve months. Company's R&D costs in 2010 were only half of what they are now. Despite the rising R&D costs the operating income, fuelled by strong revenue growth continues to increase.

We will be looking for any information regarding the potential sales of the upcoming Samsung Galaxy 5 which will have a fingerprint technology built in.

Investment Returns

The company has a healthy return on equity of 25.2% which is also above the industry average. However, we will test the quality of the equity return by comparing it to another measurement of return: the return on investment. The return on investment is impressive. With Return on equity of 25.2% and return on investment of 18.7% Synaptics Inc. satisfy investor demands. These are very healthy level, which should be maintained.

Let us look at the gap between the return on equity and return on investment. If the difference is significant it is likely that the company has unhealthy level of debt on their books that need to be reduced.

The difference between both return is not that substantial. This speaks of high quality returns and healthy debt levels. The debt levels are reviewed below but I do not expect them to be off the charts.

Debt Levels

Synaptics Inc. has healthy debt levels. In fact they may even borrow a bit more in order to finance profitable project, which would help them maximise their revenues. It should be noted that return on the investment should exceed the cost of borrowing at all times.


Gross Margin

The gross margin meet our expectations. It is at relatively healthy level of 48.7%. It should be noted however that gross margin can vary drastically from business to business. More importantly the gross margin experiences an upward trend which is a very positive sign. It shows the ability of the management to control the production costs by securing extra funds for marketing and R&D. The company gradually increases their R&D costs which allows them to employ the best talent and remain competitive.

Operating Margin

Operating margin level is quite high. The latest 12-months operating margin is at record high 17.8%. The company makes decent money on each dollar of sales. More importantly however, the operating margin experience an upward trend which is an indication that Synaptics sales are increasing faster than costs. Company's operating margin exceeds the industry one.

Net Profit Margin

Net profit margin can be quite volatile and also vary from business to business. With margin of 16.30% Synaptics Inc. meets our expectations. It is also above the average for the industry. This level of margin is comforting and it is a clear indicator that the company has a clear advantage over its competitors.

Liquidity Ratios

Current Ratio

The current ratio is above the desired level. Companies should have a current ratio of at least one in order to meet their short term obligations within a year.

Quick Ratio

The quick ratio is above the desired levels. The company is able to meet their short term obligations with their most liquid assets.


There is a large institutional ownership which indicates strong corporate governance. An insider recently sold some shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.