Synaptics’ Turnaround Is Here to Stay

Synaptics (NASDAQ: SYNA) stock has been down in the dumps for the better part of 2017 as Wall Street has largely ignored the company's potential by focusing on short-term earnings results and rumors. More specifically, the human solutions interface specialist's consistent revenue growth has been undermined by speculation that it could lose Apple as a customer.

SYNA data by YCharts

Synaptics' stock experienced a pop after it announced its first-quarter earnings report, which was a welcome relief for investors. The company's revenue jumped 8% year over year to $417.4 million for the first quarter of the fiscal year 2018, which led to a 7% increase in adjusted earnings to $1.03 per share. The numbers were well ahead of analysts' expectations of $0.96 per share in earnings on revenue of $399 million.

Synaptics also reassured investors with guidance that was in-line with expectations. Let's take a look at what worked for Synaptics in the latest quarter, and if it has enough catalysts to sustain its newly found momentum in the long run.

Mobile could drive substantial growth

Synaptics pulled in 70% of its revenue from mobile chips last quarter, and this business looks set to get even bigger thanks to a diverse range of clients. The company is supplying fingerprint sensors to likes of Huawei, Samsung, and other top-tier smartphone OEMs (original equipment manufacturers).

Huawei is using a range of Synaptics' biometrics chips across premium and budget smartphones. This is an important win for the chipmaker as Huawei's smartphone sales are increasing at a terrific pace. The company has sold more than 100 million smartphones in the first three quarters of 2017 already, surpassing Apple's shipments in a couple of months this year.

Huawei now aims to increase sales in the premium end of the smartphone space to target customers in more lucrative markets such as the U.S. Therefore, Synaptics' strong relationship with Huawei could be a boon for the chipmaker as the smartphone manufacturer expands its sales network to capture a bigger share of the market. Huawei's reach is expanding, its phones are now sold across more than 42,000 outlets, up 19% from last year.

Samsung is another marquee client for Synaptics' fingerprint sensors, adopting the technology in both the Galaxy S8 and the Note 8. More importantly, the chipmaker is said to be in the running for supplying a fingerprint sensor built right into the screen for the next iteration of the Note 8. Late last year, Synaptics had unveiled the industry's first optical-based smartphone fingerprint sensor that eliminates the need for the home button.

Though the chipmaker failed to get this solution ready in time for deployment in Samsung's latest flagships, it now has enough time to hone its technology for the next-generation devices. Synaptics management has already stated that the company will soon start volume production of the in-display fingerprint sensors, having already sampled the technology with customers.

Synaptics is preparing to tap the next big trend of edge-to-edge smartphone displays. This will open up a big opportunity for the company as this trend will push shipments of the touch and display driver integration (TDDI) chips, which Synaptics specializes in, to an estimated 654 million units in 2022 from a projected 100 million units this year, as per IHS Markit.

Synaptics is gaining traction on the Internet of Things

Synaptics' Internet of Things (IoT) business supplied 14% of its revenue last quarter, but the company expects it to account for 24% of the top line in the current quarter. This massive jump in the IoT business can be attributed to Synaptics' recent acquisition of voice and audio solutions provider Conexant, which is expected to boost its addressable market.

This acquisition should help Synaptics make a dent in the smart home market as Conexant is known for making voice and audio solutions for smart home speakers powered by Amazon's Alexa voice assistant. More importantly, Synaptics is now leveraging Conexant's AudioSmart far-field voice processing technology to land more clients.

Last month, Synaptics revealed that its audio digital signal processors (DSPs) have been selected by two companies to develop a variety of artificial intelligence-enabled smart speakers. This could be Synaptics' foray into the lucrative speech recognition market for consumer electronics applications, which is expected to grow at an annual pace of 28% through 2021 to more than $1 billion.

Synaptics seems to be focusing on the right catalysts to drive its performance in the future, helping the company sustain its turnaround and deliver long-term upside.

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