Do Not Miss Out On Synaptics' Growth Story

Jun.24.14 | About: Synaptics Incorporated (SYNA)

Summary

A series of upgrades have escalated the confidence of investors in Synaptics Incorporated. The stock touched a new 52-week high in the past week as a result of heightened confidence.

Fingerprint authentication, as a technology, has massive scope for Synaptics. After implementing the technology in Galaxy S5, Synaptics is all set to leverage well from innovation in this segment.

The deal with Renesas could prove to be a major growth driver in coming quarters as Synaptics expands its market reach.

It is not surprising to see a surge in price after a stock receives upgrades from esteemed analysts. Synaptics Incorporated (NASDAQ:SYNA) also followed a similar trend, but in a royal way, as the stock touched a new 52-week high on Friday in the past week. A considerable number of analysts upgraded the stock after the company delivered robust results for the third quarter of 2014. Besides the optimism received from analysts, the investors have positively taken the announcement of the acquisition of Renesas SP Drivers Inc., the sole supplier for display driver chips to Apple (NASDAQ:AAPL).

A series of upgrades

The most optimistic upgrade for Synaptics came from Sterne Agee, which raised its price target for the stock from $83 to $105, and reiterated a buy rating on the stock. Besides the above mentioned upgrade, analysts Needham & Company also shared their positive outlook on the stock, with a buy to strong-buy rating and a price target of $100. As per Needham, Synaptics is poised to gain favorably from its fingerprint business, with an estimated addition of $2.50-$3.00 incremental EPS, as seen by the momentum building in this segment. It is important to note that Synaptics has become the leading supplier of fingerprint authentication products to mobile and PC OEM customers.

In the third quarter, fingerprint product revenue contributed approximately 15% of the total revenue, and it is clearly evident that the acquisition of Validity, a maker of sensors used in biometric identification, has been efficiently leveraged by Synaptics.

It is a known fact that initially, Apple raised the profile of fingerprint authentication when it used the technology as a means to unlock the iPhone 5S. This feature implemented by Apple was shortly followed by Samsung (OTC:SSNLF), after the phone maker introduced game-changing technology in the Galaxy S5.

Innovation at its best

In Galaxy S5, Synaptics implemented 3D touch capability, which allows users of the smartphone to hover their fingers over the touchscreen and look through required information. Additionally, the company has also included its natural ID fingerprint identification solution in the Galaxy S5 that aims at providing maximum security with a beautiful and intuitive experience. Thus, if Apple can be credited with initializing the concept of fingerprint ID, then we have to acknowledge the partnership of Synaptics and Samsung in taking the same to the next level. As such, it is completely probable that Synaptics will see credible growth coming from this technology segment in the coming quarters, as predicted by analysts.

Risk-reward proposal

One of the reasons mentioned by Needham for the upgrade involved the attractive risk-reward relationship in case of Synaptics. Currently, the stock is trading at a forward P/E of 18.76, whereas the industry average is around 26.01. Also, the EPS growth rate for current year stands at 84% on the back of strong performance in the first and third quarters. Based on the outlook given by the management in its earnings call, the income per diluted share for the entire fiscal will work out to around $4.50-$4.60. Hence, Synaptics is trading at a 20x multiple, which is in alignment with the industry average and is a justified price for the future opportunities.

A healthy acquisition

In the beginning, I mentioned the company's agreement to buy the sole supplier of touchscreen chips to Apple via Renesas SP Drivers. Renesas is primarily a manufacturer of display driver ICs, and hence, Synaptics has reasonable scope to extract gains from this deal. Before going into the details of synergy in operations that would be obtained by the company from this acquisition, one of the obvious gains on the client side that Synaptics would be looking forward to would be winning back Apple.

As mentioned by this report, Synaptics last supplied the touchscreen chips to Apple eight years ago, before it was dropped, as Apple started manufacturing it in-house. Now, besides getting back Apple, the other probable and big benefit that will accrue to Synaptics is integration of touch and display drivers on a single chip. Hence, Synaptics will be able to expand its market by a considerable percentage after this acquisition, since it could offer chips that would include both touch and display functionalities.

Takeaway

The primary reason to invest in Synaptics is that it is a market leader with most of the big-ticket clients under its umbrella. Ranging from Samsung and LG to mobile and PC manufacturers like Lenovo (OTCPK:LNVGY) and Huawei, Synaptics has made all the right moves in executing a fabulous expansion. On top of the big book of clients, the company has impressive line-up of products in the form of fingerprint authentication technology and integration of display drivers into its touchscreen chips. All in all, this stock is an ideal investment candidate that is poised for phenomenal growth in future quarters.

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

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