Better Buy: Synaptics vs. Cypress Semiconductor
Investors in chipmakers Synaptics (NASDAQ: SYNA) and Cypress Semiconductor (NASDAQ: CY) have a different story to tell this year. These two semiconductor specialists have enjoyed varying fortunes on the stock market in 2017 as their smartphone chips businesses have headed in different directions.
Apple has turned out to be the big difference between the two chipmakers, with Cypress expected to have landed a spot on the next iPhone to enable fast charging. Synaptics, however, seems to have missed a golden opportunity despite being the only company with a workable solution to integrate fingerprint scanners into a touchscreen, as Apple decided to skip this feature.
But can Synaptics overcome this missed opportunity and turn its fortunes around in the long run, or will Cypress be the better choice for investors? Let's find out.
The case for Synaptics
Savvy investors should look beyond Synaptics' failure to gain from Apple's iPhone as there is a lot of opportunity in the touch and display driver integration (TDDI) space. Smartphone OEMs (original equipment manufacturers) are increasingly adopting edge-to-edge displays to enhance screen size without making devices bulkier.
The mainstream acceptance of this design philosophy will be a big deal for Synaptics in the long run -- it could boost demand for TDDI chips from a potential 100 million this year to over 650 million units in 2022. Synaptics is well-placed to tap this potential growth since it has already developed a solution to attack the opportunity.
Furthermore, Synaptics is said to be just one of three companies working on TDDI chips, with the other two being Apple and Japan Display. Apple is unlikely to sell its technology to rival smartphone OEMs, which means that Synaptics could have a good run in this market if it manages to hold on to its smartphone clients.
Synaptics' clients such as Xiaomi, OPPO, Huawei, and Samsung are already using the company's TDDI solutions in their smartphones, so Synaptics is in a strong position to benefit from the secular growth in this space. Additionally, the chipmaker has increased its addressable market by $2.8 billion after the acquisition of audio chip specialist Conexant Systems for $343 million.
The Conexant acquisition allows Synaptics to tap the potential growth in voice-controlled speakers. In fact, Conexant supplies solutions for Amazon's Alexa and Echo devices, so it could be a huge growth driver for Synaptics since the e-commerce giant is expected to command about 70% of the voice-controlled speaker market this year.
The case for Cypress
Just like Synaptics, Cypress can also benefit from a secular growth trend in the mobile space -- USB-C. The USB-C technology is fast gaining traction as the new standard for transferring data and charging mobile devices including laptops, tablets, and smartphones.
In fact, Strategy Analytics forecasts that USB-C adoption will grow 89% annually over the next four years. Cypress is in a great position to take advantage of this spectacular growth as it currently controls 35% of the USB-C market. Not surprisingly, the company has already seen a 50% boost in USB-C adoption by customers, a trend that's likely to continue given the market's long-term potential.
More importantly, USB-C adoption will quickly start delivering results for Cypress. The company claims that its USB-C technology will power 75 laptop device lines by the end of the year, while a design win at Apple could boost the company's earnings by 25% next year. Therefore, USB-C should prove to be a catalyst for Cypress both in the short and long run.
But investors shouldn't miss the company's advances in the automotive space, either. Cypress' automotive microcontrollers have attracted a lot of interest from several automakers and component manufacturers. For instance, hotspot connectivity in Audi's new A8 sedan is being powered by the chipmaker's 802.11ac module.
On the other hand, major names in the automotive component space such as Denso, Continental, and Bosch are also using Cypress' microcontrollers in use cases such as body electronics. Therefore, a rapid increase in the number of connected cars on the road will expand Cypress' addressable market, and it is well-positioned to grow in the space thanks to its relationships with the key players.
The verdict
Cypress and Synaptics have powerful catalysts that could boost their businesses in the long run, but the former seems to be the safer bet. Synaptics is currently facing trouble in the discrete display driver business, along with a decline in demand for its mobile chips. By comparison, Cypress is in ascendancy and ticked all the right boxes last quarter by displaying growth across business lines.
The chart below clearly shows that Synaptics' top line has hit a roadblock, while Cypress has stepped on the gas.
CY Revenue (Quarterly) data by YCharts
Additionally, Synaptics could lose some of its clout at Samsung. The chipmaker's fingerprint components in the Korean giant's Galaxy and Galaxy Note flagships next year could be replaced by Egis, according to Ming-Chi Kuo of KGI Securities.
On the other hand, Cypress Semiconductor should sustain its momentum on the back of an Apple win and other mobile devices utilizing its USB-C technology. Therefore, Cypress looks like the better buy of the two as it doesn't have any visible headwinds right now to contend with.
10 stocks we like better than Cypress Semiconductor When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Cypress Semiconductor wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of September 5, 2017
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.