Will Synaptics Incorporated Win the Touch ID Spot Inside of the OLED Apple Inc. iPhone?

By Ashraf Eassa Markets Fool.com

Analyst Timothy Arcuri with Cowen recently put out a note in which he went over some of the information that his team gleaned from supply chain checks (via AppleInsider). You can read the full AppleInsider article for the rest, but there was one portion of the report that stood out:

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Arcuri reiterated those claims, and predicted that Apple may switch to [Synaptics' (NASDAQ: SYNA)] optical-based fingerprint reader for the new Touch ID sensor, citing it as "currently the only workable solution" for detecting a fingerprint through a smartphone screen.

By way of background, Apple purchased a chip company known as AuthenTec back in 2012, and it is this acquisition that gave Apple the key technology and people that allowed it to debut its Touch ID fingerprint scanning technology in the iPhone 5s and in subsequent models.

Does it make sense that Apple will eschew its homebrew fingerprint sensor technology in favor of a solution from Synaptics? Let's take a closer look.

It's possible if Apple's own tech development is behind schedule

It's extremely likely that Apple has been working on technology to support sensing fingerprints through the screen. Indeed, it's extremely unlikely that Apple purchased AuthenTec just so that it could build a couple of generations of fingerprint sensors and then just stop.

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Image source: Apple.

Apple would have been better off not buying AuthenTec in the first place and just sourcing fingerprint sensors from them and/or other suppliers in that case.

No, the reason that Apple likely shelled out the money to buy AuthenTec is almost certainly that it wanted to be able to develop differentiated technologies to help realize the company's future product visions.

By developing this technology in-house, Apple not only limits the amount of future product information that it must share with third parties, but -- if successful -- allows Apple to enjoy a competitive advantage for some time.

That's what happened with the original Touch ID, and that could very well be the case that it is developing a unique technology to allow it to scan fingerprints through the screen itself.

Nevertheless, while Apple's technical execution tends to be good, the company is by no means perfect. Apple's development teams may have run into technical snags in developing its homebrew through-the-display fingerprint sensing solution, and it could very well need to lean on third party suppliers -- like Synaptics -- for the right technology.

The potential scenarios

If Apple does turn to Synaptics for fingerprint scanning solutions for the OLED iPhone, this would represent a very nice revenue and profit boost for the latter -- at least through the next iPhone cycle. The risk, of course, is that it would likely only be a matter of time before Apple designed out Synaptics in favor of a homebrew solution, meaning that any financial boost for Synaptics would be short lived.

The other scenario is that Apple's in-house efforts are working just fine and Synaptics doesn't win the business at all. This, in my view, is the more likely scenario.

In either case, though, I'm not optimistic that there's a long-term opportunity for Synaptics to provide fingerprint scanning solutions to Apple. Synaptics' best bet is to continue to court weaker smartphone vendors -- ones that don't have the inclination or ability to develop their own technologies in-house.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.