Samsung's Galaxy S5 Will Take This Chipmaker to New Highs

The way chipmaker Synaptics (NASDAQ: SYNA  ) kicked off the year can be summed up in one word -- inauspicious. First, Synaptics posted mixed results and issued a terrible earnings outlook.  Next, the stock received a downgrade from Oppenheimer due to its high valuation. But Synaptics has engineered a remarkable turnaround and is up in the high teens in 2014.

The company came back with a bang after it was revealed that it is supplying Samsung (NASDAQOTH: SSNLF  ) with the fingerprint sensor and the touchscreen controller for the Galaxy S5. This has, no doubt, given Synaptics a good shot in the arm. The company will surely look to build upon this design win, and it also has the likes of Sony (NYSE: SNE  ) , Google, and Lenovo (NASDAQOTH: LNVGF  ) to count upon.

Samsung: Cracking some numbers
Sales of the Galaxy S5 haven't kicked-off yet, although the pre-orders have begun. As such, the device doesn't have any initial sales numbers to show for as of yet. Moreover, Samsung doesn't have any high-flying expectations from the device either as sales of the Galaxy S4 weren't as great as the company had expected. So, Samsung has kept sales expectations for its new flagship modest, according to a Korean publication.

Samsung expects to sell a total of 360 million phones this year, out of which 35% will be premium handsets. This puts the sales number of high-end phones for this year at 126 million, which is still huge. Given that Synaptics was also powering the touchscreen of the Galaxy S4, it can expect to sell a good number of chips this year to Samsung.

Samsung had accounted for 14% of Synaptics' revenue last fiscal year from less than 10% in the preceding year. The Samsung account can grow further as the Korean giant is planning to focus more on sales of its low- to mid-range handsets and tablets.

Now, Synaptics is not focusing on the high-end stuff. Its broad product portfolio also includes mid-range and the lower-end type solutions where the company is seeing robust growth, according to management. However, the good part is that the product mix is expected to be inclined toward the premium segment according to CFO Kathleen Bayless.

More than just Samsung
Samsung isn't the only high-end customer of Synaptics. The company has managed to place its solutions in Sony's (NYSE: SNE  ) Xperia Z1 and Google's Nexus 5. The Xperia Z1 was one of the driving factors behind a year-over-year surge of 30% in smartphone sales at Sony in the third quarter of last year. The fourth quarter was even better with sales rising 45%. On the other hand, Google called the Nexus 5 a sales success. Thus, Synaptics seems to be pulling all the right strings in the smartphone market.

Synaptics also seems to enjoy a good position among smartphone makers in China, and this could turn out to be a big advantage in the future. Synaptics management states that it has strengthened its relationship with leading Chinese companies such as Lenovo, Huawei, ZTE, Gionee, and Coolpad. The company has been supplying its solutions to these players already, and the deployment of LTE in China could further boost sales.

The roll-out of TD-LTE by China Mobile will give rise to strong demand for LTE handsets. The telco expects 4G handset shipments to reach 200 million this year in China from just 4.6 million units in 2013. Now, Samsung, Lenovo, Coolpad, and Huawei hold the top four positions in the Chinese smartphone market, and since Synaptics sells its solutions to all of these, it is in a good position to take advantage of growth in LTE handsets. 

Another big opportunity
Also, the buyout of Motorola by Lenovo will also positively impact Synaptics. The Moto G was powered by Synaptics' single layer on-cell solution and it has been a success in the European market due to its value for money positioning. The acquisition of the brand by Lenovo will open a bigger market for Motorola as the Chinese company has grand designs for its latest purchase.

Lenovo plans to end Motorola's losses within a few quarters as it will be reestablishing the brand in China and other emerging markets in both the premium and budget segments. This means that Synaptics will have yet another volume player at hand in the smartphone market to count upon. 

Still cheap and worth buying
Over the past one year, Synaptics shares have gained close to 60%. But still, the stock trades at a cheap 16 times last year's earnings, which is almost half of the industry average P/E ratio. This is quite cheap for a company whose earnings were up 56% in the previous quarter on the back of 44% growth in revenue.

In addition, Synaptics has almost negligible debt, is cash flow positive, and regularly buys back shares. So, a cheap valuation, a strong balance sheet, and solid prospects make Synaptics an ideal stock to buy to profit from smartphone sales.

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Harsh Chauhan

Harsh has been covering technology, and sometimes retail, since 2011. He is focused on finding great businesses for the long run. You can follow him on twitter @techjunk13

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