Is Synaptics Beating Cypress?

Cypress has posted a couple of decent quarters now, but the company isn't out of the woods yet.

Apr 28, 2014 at 2:30PM

Cypress Semiconductor (NASDAQ:CY) has finally given some hope to investors. Cypress' recently released first-quarter results met estimates and the company also issued a decent guidance for the ongoing quarter. The chipmaker has reported consistent quarterly results a couple of times in a row now and is boasting of design wins at key Chinese smartphone players. However, should investors go all out and buy this 4.40%-yielder despite stiff competition from Synaptics (NASDAQ:SYNA) and Atmel?

Improvements worth noting
At first glance, it seems that Cypress is taking the right steps. In the first quarter, Cypress' non-GAAP operating income was up a massive 116% year over year, while free cash flow increased 60% on a sequential basis. In addition, Cypress saw a 11% decline in inventory on a quarter-over-quarter basis, signifying that the company's products are in good demand.

What's more, Cypress exited the first quarter with an impressive book-to-bill ratio of 1.08, similar to what it had reported at the end of the fourth quarter. Thus, Cypress is booking more orders than what it is billing right now, indicating a robust ordering pattern. The bottom line increased to $0.07 per share from last year's $0.03.

Now, the only concerning point is that Cypress' revenue actually fell year over year. However, due to aggressive cost controls and efficiency improvements, the company managed to deliver an improved earnings performance. Once the chip-maker's revenue starts growing, it could turn out to be a good investment. But, this won't be easy.

Is revenue growth in the cards?
The fact that Cypress ended last quarter with a book-to-bill ratio of above 1 suggests that the company is receiving a good number of orders. These should positively impact its top line going forward. In addition, Cypress recently recorded a number of design wins at Chinese smartphone makers Huawei and ZTE.

At Huawei, Cypress recently won the contract for supplying its touchscreen controller to five new smartphones. This is an impressive win for Cypress, since Huawei's smartphone business is growing at terrific pace. Last year, Huawei captured the third position in worldwide unit sales in smartphones, according to IDC, with shipments growing almost 68% on a year-over year basis. Additionally, in February, Cypress announced that its TrueTouch touchscreen solution will be used by ZTE in its flagship phones.

Looking ahead, the Chinese smartphone market is expected to soar, and design wins at Huawei and ZTE are massive advantages for Cypress. Last year, the number of LTE handsets shipped in China were an estimated 4.6 million, according to iSuppli. By 2017, this number is expected to jump to 300 million. Both Huawei and ZTE are into close relationships with Chinese telcos such as China Mobile and China Unicom, which is why design wins at these companies will be lucrative for Cypress in the long run, ultimately leading to revenue growth.

It's not as easy as it sounds
While there is good news for Synaptics in China, increasing competition from Synaptics is a big cause for concern. Both Synaptics and Cypress are suppliers to Samsung (NASDAQOTH:SSNLF). However, it looks like that Synaptics is gradually elbowing out Cypress here. Synaptics is supplying touchscreen controllers and fingerprint technology to Samsung for the latest Galaxy S5.

This would have come as a surprise to some Cypress investors, who might have been expecting the company to grab the controller spot after it supplied the same for the Note 3. But this isn't the case and Cypress could lose more ground at Samsung. According to Needham, Synaptics is the one that's grabbing more share of the mid-tier devices at Samsung, not Cypress.

This could be a big blow to Cypress since Samsung expects to sell a total of 330 million smartphones this year, primarily driven by mid-tier and budget devices. 

The bottom line
Cypress has solid momentum right now. It is getting traction in China and has a strong order book to boast of. However, competition from Synaptics is a big threat for the company that investors shouldn't ignore since this can erase the gains that Cypress might see elsewhere.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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