2 Samsung Suppliers to Buy, 1 to Avoid

Due to the global slowdown in smartphone shipments, a recent poll of 23 analysts -- conducted by Thomson Reuters -- suggests that Samsung's (NASDAQOTH: SSNLF  ) smartphone division will post low single-digit growth over the coming year. 

This presents a gloomy outlook for the smartphone giant. But, should you be bullish or bearish on Samsung's key hardware suppliers, namely Synaptics (NASDAQ: SYNA  ) , Cypress (NASDAQ: CY  ) , and Universal Display (NASDAQ: OLED  ) ? 

Touchpad maker
The accuracy and pressure sensitivity of the sensors in touchscreen devices largely determines the overall smartphone user experience. Although there are a myriad of touchpad vendors, Samsung has roped in Synaptics to power its high-performance devices like Note 3 and Galaxy S5. 

Regarding exposure, Synaptics generates about 14% of its overall revenue from sales to Samsung. The electronics component manufacturer has a diversified clientele that includes Nokia, Blackberry, and HTC, which hedges its risks and results in balanced growth. 

Synaptics touchpads are currently equipped in only a handful of high-end offerings. Samsung's budget-friendly devices make use of relatively less-accurate and inexpensive touchpads from different vendors, which leaves huge growth potential for Synaptics to tap.

To counter intensifying market competition from established and downmarket offerings, Samsung might soon want to equip Synaptics touchpads in its mid-range devices. This will open a whole new growth avenue for Synaptics, and, in turn, boost its top line.

The touchpad vendor, therefore, may continue to grow, despite Samsung's expected smartphone slowdown.

OLED manufacturer
Universal Display is another key Samsung supplier. The company manufactures OLED display panels, which deliver a wide gamut of colors and contrast. For this reason, Samsung relies on Universal Display to power its premium mobile offerings like Galaxy S5 and Note 3. 

Speaking of revenue mix, sales to Samsung Display represented about 68% of Universal Display's overall revenue in 2012. The company's lack of diversification is undoubtedly a concerning factor. Investors, however, should note that Universal Display is well-positioned in a booming industry. 

DisplaySearch estimates that smartphone OLED display market share will grow from the current 0.2% to 40% in 2018 -- an impressive twenty-fold growth. Considering that Universal Display is a leader in its industry and has very few competitors, the company should, in theory, be able to reap the rewards of this expected growth mostly by itself. 

Touch controllers
Samsung mobile devices also make use of touch controllers -- touch sensitive buttons positioned within the body of smartphones. Cypress Semiconductor designs and manufactures these sensors for Samsung's Note 3 devices. 

The electronics components manufacturer derives about 10% of its revenue from sales to Samsung. Unlike its peers, however, the company doesn't offer robust growth prospects. 

Harsh S. Chauhan, a fellow Fool contributor, notes that Synaptics -- also a prominent touch controller manufacturer -- has signed crucial controller deals with Amazon and Samsung over the last year. Its aggressive design wins, in turn, have made it harder for Cypress Semiconductor to grow, and contributed to its revenue decline.

Therefore, investors should wait for Cypress Semiconductor to land a few controller design wins against Synaptics before getting bullish on it.

Wrap up
Both Synaptics and Universal Display are the leaders in their respective industries and seem well-positioned to grow amid the expected Samsung smartphone slowdown. Cypress Semiconductor, however, has yet to gain ground against Synaptics, which is why investors might want to avoid it.

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Piyush Arora

Piyush, an Electronics Engineer with an MBA in Finance, is continuously looking for discrepancies in market pricing. He likes to research tech stocks that incur minimal risks and offer healthy returns, over the short-medium term period.

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Related Tickers

9/3/2015 1:01 PM
CY $10.12 Down -0.12 -1.17%
Cypress Semiconduc… CAPS Rating: ***
OLED $36.59 Down -0.17 -0.46%
Universal Display CAPS Rating: ****
SSNLF $932.51 Down +0.00 +0.00%
Samsung CAPS Rating: ***
SYNA $70.78 Up +1.18 +1.70%
Synaptics, Inc. CAPS Rating: ****