1 Reason Synaptics Will Continue to Grow

Synaptics (NASDAQ: SYNA  ) is already beating Cypress Semiconductor (NASDAQ: CY  ) to the punch when it comes to high-end touch controllers for smartphones and tablets. The touch specialist continues gaining share with both companies' biggest customer, and may be able to capture more of the mid-range market as OEMs try to differentiate their products.

But, one trend indicates that Synaptics will continue gaining share in the touchscreen market, particularly in the mid-to-high-end.

Research & Development
Synaptics now generates more revenue than Cypress Semiconductors.

SYNA Revenue (Quarterly) Chart

SYNA Revenue (Quarterly) data by YCharts

With the decline in PC sales, Cypress has seen its revenue decline steadily over the last couple of years. Although sales in other areas are starting to offset the decline in its memory products and data communications divisions, the decrease in sales has taken its toll.

When sales decline, a company's ability to invest in its future declines as well. As a result, Synaptics surpassed Cypress' research and development budget this year.

SYNA Research and Development Expense (Quarterly) Chart

SYNA Research and Development Expense (Quarterly) data by YCharts

Although each company may vary on what it considers R&D expenses, the fact that Synaptics is increasing its budget while Cypress is forced to curtail its own doesn't bode well for Cypress' ability to compete with Synaptics in the future.

Cypress still spends a larger portion of its revenue on research and development compared to Synaptics, but it's certainly gotten there the hard way. Also, consider that Synaptics has increased its R&D expenditure nearly twice as quickly as it has grown revenue over the last five years. Comparatively, Cypress has decreased its R&D budget slightly faster than its decline in revenue.

SYNA Research and Development Expense (TTM) Chart

SYNA Research and Development Expense (TTM) data by YCharts

Focus
Keep in mind that Cypress has a broader product portfolio compared to Synaptics. That means that its research and development department likely isn't as effective as Synaptics.

Cypress has four main divisions: memory products (SRAM and legacy clocks), data communication (USB and Bluetooth low-energy), programmable systems (touch), and emerging technologies (a catch-all for new developments). The amount of overlap between these divisions ranges, but it's relatively small compared to Synaptics' operations.

Synaptics is more focused on touch technology. The company makes touchscreen solutions, touchpads for laptops, it integrates its capacitive touch controllers into ThinTouch keyboards, and recently acquired Validity Sensors for fingerprint scanning technology.

How do prices compare?
You would think that with the excellent potential for growth at Synaptics, its stock price would be well above Cypress'. Remarkably, they're priced very similarly across the valuation metric board.

 

Cypress Semiconductor

Synaptics

Price/Earnings (2015 est)

14.39

12.99

Price/Sales (2015 est)

1.92

1.90

Price/FCF (ttm)

28.99

29.11

Source: Yahoo! Finance

Now, it would make sense for both companies to garner similar valuations if they had similar outlooks for growth, but where Cypress now pays out a good portion of its revenue as a dividend, Synaptics is investing in more R&D and acquisitions.

As a result, analysts expect Synaptics to grow earnings over 20% annually during the next five years. Revenue ought to grow even faster. Comparatively, analysts expect Cypress to grow earnings at a rate of just 10% over the next five years, with growth coming from a combination of improved operating efficiency and increased revenue.

Already paying off
Synaptics' growing R&D budget is already starting to pay off. As long as the company continues to operate under the same general method of reinvesting revenue into more R&D, it should be able to continue expanding its share of the touchscreen market. Additionally, smart acquisitions like Validity Sensors will give the company additional avenues for growth.

It's no wonder analysts see so much upside in Synaptics' stock price.

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