Synaptics Shows How You Can Still Benefit From Smartphones

The smartphone market might be saturating, but China isn't. This is where Synaptics is making merry.

May 5, 2014 at 6:30PM

Opinions can change at the drop of a hat on Wall Street. In January, chipmaker Synaptics (NASDAQ:SYNA) was being ridiculed after mixed second-quarter results, and was the subject of a downgrade by Oppenheimer because of its high valuation. Cut to the present, and Wall Street analysts now expect Synaptics to hit $100 from its current levels of around $60.

Everyone seems enchanted with Synaptics' fingerprint and touchscreen sensors that are being supplied to Samsung (NASDAQOTH:SSNLF), displacing the likes of Atmel and Cypress. In fact, analyst Rajvindra Gill of Needham has stated that Synaptics' fingerprint business could result in additional earnings of $2.50-$3.00 per share over the next 1-2 years. In addition, the core touch business is expected to generate EPS of $3.50-$4.00.

In the trailing twelve months, Synaptics' earnings per share was a modest $1.59, making it easy to see the earnings upside that's expected going forward. But, will Synaptics be able to justify such high expectations?

The South Korean angle
Fingerprint sensors are the new craze in mobile devices, and Synaptics is doing well to make the most of it after acquiring Validity Sensors last October. Apple (NASDAQ:AAPL) made it popular, but Samsung went one step further with the Galaxy S5. Apple's Touch ID requires a user to press and hold the home-screen button. However, Samsung has made it easier since the user just needs to swipe vertically across the home button to use the scanner.

Alone, this isn't a big deal, but Samsung's Galaxy S5 allows users to pay through PayPal using a swipe of their fingers, which the iPhone doesn't. Perhaps the biggest deal of all -- the sales numbers -- suggest that the Galaxy S5 has started selling at a remarkable pace.

As reported by iQmetrix, which sells retail management software to the North American wireless device industry, the Galaxy S5 accounted for 23% of the total number of phones sold in the U.S. during its launch weekend. In Canada, the number was 18%. In comparison, the iPhone 5s accounted for just 18% of the phones during its launch weekend in the U.S., while the performance in Canada was even worse at just 13%. 

Moreover, Samsung's latest flagship is selling faster than the previous one, which indicates that the South Korean giant might end up selling more than the 126 million high-end phones that it expected to sell this year. Hence, Synaptics has ended up in a great spot by aligning itself with Samsung.

Making merry in China
China is the biggest smartphone market on the planet. It pays well to have a good relationship with important OEMs in the region, and Synaptics seems to have done just that. Synaptics' list of Chinese customers is very impressive. It counts smartphone makers such as Lenovo, Huawei, ZTE, Gionee, and Coolpad on its client list.

These companies could give Synaptics a big boost going forward. In fact, Coolpad's market share in China is more than Apple's, and it ranks behind only Samsung and Lenovo, all of which are Synaptics' customers. According to Canalys, smartphone shipments in China are expected to rise to 422 million units this year, up from 354 million last year. Since Synaptics enjoys strong relationships with all the leading players in the Middle Kingdom, the company seems to be in pole position to make the most of this market.

Final words
Synaptics is growing fast. Its revenue in the recently reported third quarter was up 25% year-over-year. Considering this attractive growth rate, along with the fact that Synaptics is sitting on some big opportunities in the smartphone market, its forward P/E of just 13 looks cheap. Given the tremendous growth in smartphones expected in China, and the growing adoption of fingerprint applications in mobile devices, Synaptics should be able to live up to expectations in the future.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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