Pullback in Synaptics a Good Buy Opportunity

Synaptics (SYNA) is a technology outfit that makes touchpads, click wheels and other control components used in laptops, mp3 players, cell phones and other mobile devices. The company also manufactures touch screens that allow users to tap and slide their fingers on screens across the spectrum of consumer products.

While Apple's iPhone does not use Synaptics' technology, LG's Prada phone and other LG models are using their gesture-recognition technology. Moreover, the company has also signed up Samsung and Motorola for future such versions of their phones.

In their most recent quarter, Synaptics earned $11.3 million, or 41 cents a share, on revenue of $86.7 million. This is an increase of 176% from the $4.1 million, or 15 cents a share, on $54.8 million in sales in the year-ago quarter. In fact, excluding one-time items, Synaptics earned 54 cents a share, which demonstrates the strength of their business.

Over 80% of Synaptics' revenues comes from laptop sales, but the company has done well to bring this down from over 90% a year ago. Indeed the company has 65% of the world's laptop market share, with laptop sales set to grow at 27.4% this year to 105.3 million units. That follows growth of 26.4% last year and 33.5% in 2005. Even though such growth will decelerate over the next few years, Synaptics plans to have more components in laptops than it does currently by using dual-mode pads and light-touch controls. More and more laptops now have buttons for DVD playback, volume control and other short-cuts for better look and feel. Additionally, their biggest growth segment over the next few years will be mobile handsets, which is growing at 200%.

A few years ago, SYNA was extremely popular. It was the exclusive provider for Apple's (AAPL) iPod click wheel. Then news of Apple diversifying its component providers which would result in lost business for SYNA sent the stock hurtling down. After a successful run from $15 in Aug 2004 to $38 in Nov 2004, the stock plummeted back to $15, giving up all of its 150% gain. Since then, the stock has not looked back, and since July 2006 alone, the stock is up almost 200%. Almost 13% of the float is still being shorted, and with earnings growth recently clocking in at triple digits, the stock has quite a few reasons to continue its recent bull run.

I first brought Synaptics to your attention in my post titled "Synaptics Points and Clicks its Way Higher" back in August. Since then, the stock has climbed 36% despite a 10% correction this week. The recent pull back is a good opportunity for buy and hold investors to open a new position in this name.

Full Disclosure: I do not own AAPL or SYNA but my position can change anytime without notice.