The semiconductor industry, embodied by new AI systems designed by Nvidia, has laid the groundwork for the next bull market. As measured by the iShares Semiconductor ETF, leading semiconductor stocks are up over 40% in the last 12-month stretch, significantly outperforming both the S&P 500 and the Nasdaq-100 stock indices.
Data by YCharts.
But not all chip stocks have fared so well. Mobile chip companies, even those that supply mighty Apple, have underperformed their peers by a wide margin. One of those laggards is Synaptics (SYNA 1.93%), a small fabless designer that focuses on connectivity and computing-interface technology. Apple and other smartphone companies have historically had a big impact on Synaptics' success. The market may have given up on Synaptics, but it could be time to buy before it plays catch-up.
When Apple isn't a great supply partner
Supplying parts for the iPhone and the general Apple product portfolio is a lucrative contract. Many small chip companies have ridden Apple's coattails over the last couple of decades during the mobile-computing revolution.
But Apple's growth has been losing steam. That hasn't been a problem for Apple as it has continued to squeeze earnings growth out of its sales. One way it has been able to do so is to get more favorable pricing out of its chip-supply partners, and it can do so because of its massive scale. It's Apple, and no one really wants to walk away from that kind of relationship. For a company like Synaptics, which said its largest customer (probably Apple) was 10% of revenue in fiscal 2023 (the 12 months ended in June 2023), that can cause financial headaches.
Complicating matters, the entire consumer-electronics market has been thrown into chaos after pandemic-era boom times came to an end in 2022. The result has been excess chip inventory, which companies like Synaptics have been working with product partners to reduce by lowering sales of new chips. The result has been a big drop in sales and profit in the last year.
Data by YCharts.
The good news is that management thinks the worst of the downturn is now in the rearview mirror, and a robust recovery will begin to pick up steam in calendar year 2024.
Synaptics' future is 'edge AI'
In early September 2023, Synaptics held an investor update, showing shareholders its charted path to long-term growth. In a nutshell, it's all about "edge AI," designing chips for mobile computing to take advantage of the generative AI movement now taking place in data centers thanks to Nvidia.
In the coming years, all that data-center work will percolate into mobile devices -- and not just smartphones. The Internet of Things (IoT) could be industrial equipment, smart home devices, or virtual reality (VR) headsets. And thanks to a few planned shake-ups over the last few years, nearly 60% of Synaptics' sales are now tied to IoT chips, with expected slower-growth smartphone revenue down to just about 20% of the total. Back in fiscal 2017, smartphone chips represented over 80% of Synaptics' revenue.
Based on research from Gartner and Synaptics' own estimates, it thinks the market for IoT chips will grow an average of 12% a year from now through 2027. That's far higher than the average 7% expected growth of the semiconductor industry overall during that span of time. Synaptics' own plan of attack is around its three specialties: sensing chips (like touch and biometric scanning, and audio controllers), processors (including a new line of AI processors for on-device, next-gen computing), and connectivity (Wi-Fi, Bluetooth, etc.).
All of this sounds promising and especially so if IoT and personal computing head in the direction of "spatial computing" (augmented and virtual reality), like with Apple's Vision Pro headset that comes out next year. Synaptics could indeed have a lot to gain if it does with its blend of processors, sensing, and connectivity designs.
But for now, it's all about working through those smartphone and consumer-electronic inventories. Synaptics is going to have a down year in 2024. Even still, shares trade for 27 times expected fiscal 2024 earnings and about 28 times expected free cash flow. If you believe Synaptics will return to growth -- and especially profitable growth -- beyond this next year, this could be a great value as the company begins to lap the deep slump in the semiconductor market.
