Synaptics (ticker: SYNA), maker of touchpad products for PCs and MP3 players, recently lost key contracts to supply Apple's iPod Nano and iPod Video with scrollwheels. Competitor Cypress Semiconductor (ticker: CY) displaced Synaptics, which had supplied the earlier iPod models with this critical component. SYNA stock, already down nearly 50% for the year, dropped an additional 25% at that time (end of August), but has since rallied back somewhat.
Steven (a pseudonym) is a hedge fund manager who is long Synaptics and submits the following bull case for the stock, based on information that Synaptics has regained the iPod scrollwheel. Seeking Alpha has not checked the veracity of his claims. As always, readers should check claims and data for themselves. Corrections and disagreements welcome in the comments below:
I am long SYNA because they have the iPod wheel back. According to sources in Asia in the packaging industry, SYNA has started producing the wheel for the iPod again, and will begin shipping in mid December.
SYNA has a NDA with Apple, so they will not put out a press release or confirm publicly.
The shipments will become material to their business in a small way in December and more so in 2006. Supposedly the Cypress part has a moisture problem and they cannot keep up with production.
The part for the iPod is very specific, and thus cannot be used in any other device, and according to the packaging source, this part is being produced in volume in Asia for shipping starting in mid December. SYNA would not build a part on the expectation of an order from Apple; rather, they would build it only with a purchase order in hand -- because the part is not transferable to another device. The packaging source in Asia tells me that the part being produced can only be for Apple and no other customer, because of the volume ordered and the part specifics.
This is my opinion and an interpretation of the facts that I have gathered. No part of this information comes from the company as they are under NDA. The company does not have to change guidance for the December quarter as it not yet material. So this means no press release. This is not "inside information" as the company will not confirm any of this specifically or directly, and the company has not told me any of this. The change is that I believe that they will no longer vehemently deny certain facts. This is a subtle but important change. This is all deduction, from putting together pieces of the puzzle. Again in full disclosure -- I own the stock of SYNA.
A recent Forbes article on SYNA hinted in this direction: "Ironically, perhaps, the most intriguing possibility for renewed growth is for Synaptics to get back inside the iPod. "I never told you that I'm not working on Apple stuff," Lee says. Cryptically he adds: "We're not in the Nano. But I'm not saying we will never be in the Nano." In addition to Apple's difficulties with its own laptop touchpads, it also may have a moisture problem with its Nano scroll wheel. That, Microsoft executive James Allchin says on a blog, seems to be why his Nano broke after a day. Synaptics prides itself on controlling that problem."
I am currently estimating that the stock market has assigned about $5 for winning back the iPod business, but I believe that as this news becomes discovered over the next 2 months it is worth another $10 to the stock price. FYI, SYNA presents at Lehman and First Albany this week.
SYNA 1-yr chart:
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