It's an exciting time for investors in Synaptics (NASDAQ:SYNA). The company's core touch business grew a healthy 6% year over year, but that's not the big news. Synaptics has made two important acquisitions in the last six months, which will expand its business drastically and might even help it win new business with Apple (NASDAQ:AAPL). Not surprisingly, Synaptics' stock price surged on the news, and it's now trading at record levels. What exactly are Synaptics' acquisitions about, and can the company's future justify the new higher share price?
Let's take the biggest and the most recent news first. On June 10, Synaptics announced it will be acquiring Renesas SP Drivers, which makes display drivers for LCDs and had yearly revenue of approximately $650 million in 2013. Synaptics will pay $475 million for Renesas SP, a relatively modest sum well below the average rate for such an acquisition, according to Bloomberg.
According to management, the acquisition will expand Synaptics' addressable market by 150%. Also, since Renesas SP handles display drivers, and Synaptics handles touch drivers, this acquisition opens up the door to a single chip that could handle both down the line. This would lower costs and power consumption, making it attractive to customers, while at the same time increasing Synaptics' margin and market share.
Apple, which uses LCDs powered by Renesas SP's drivers but makes its touch controllers in-house, was rumored to also be interested in buying the Japanese company. Once the sale to Synaptics was announced, speculation arose about Apple eventually becoming a Synaptics customer for touch also. While this is certainly a possibility in the fast-moving tech world, some analysts have pointed out that the unusually low price Synaptics paid might be an indicator that Renesas SP in fact lost Apple as a customer for future phones.
Last November, Synaptics made another big acquisition, buying fingerprint ID provider Validity Sensors for $255 million. Apple provided a fingerprint sensor in the iPhone 5s last year, and this started a trend that is expected to bring fingerprint sensors to over half a billion devices within the next two years. The Validity acquisition positions Synaptics to capitalize on this expansion, and to be the No. 1 provider of fingerprint sensors for Windows and Android phones.
At the moment, fingerprint technology is mostly a convenience feature used to unlock the phone. Further down the line, Synaptics expects it will become a fundamental technology for security and payments within mobile devices, and it has been pushing this vision as a member of the FIDO alliance, a consortium of companies aiming to develop strong online authentication.
So far, the Validity acquisition appears to have been a big success. Synaptics' fingerprint sensors have been included in Samsung's flagship Galaxy S5 and HTC's One M8. As a result, the Validity business has been accretive in its first full quarter within Synaptics, a quarter ahead of schedule, and now represents 15% of total revenue.
The core business
Synaptics isn't just trying to grow by acquisition. Its core business, touch controllers, is doing well on its own, with 6% year-over-year growth in the first quarter. Looking forward, Synaptics sees an opportunity with large touchscreens, as well as touchscreens in low- and mid-range smartphones.
This is a market in which Synaptics will be competing with Atmel (NASDAQ:ATML), which is currently the largest provider of controllers for large touchscreens, and which is trying to expand its share in smartphones as well. Following a challenging year for the touch business in 2013, Atmel refreshed its touch product portfolio and claims that it has started to take business away from incumbents. The next year will show whether this poses any threat to Synaptics.
Synaptics has made two key acquisitions, Renesas SP and Validity Sensors, that have drastically expanded its addressable market. Furthermore, the Renesas acquisition opens the door to a new kind of chip to control both the display and the touch interface in smartphones and tablets, which could provide additional opportunities for Synaptics down the line. Even with possibly increasing competition from Atmel, Synaptics is certainly in for a period of rapid expansion, and is worth a look in spite of the recent increase in its share price.
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Srdjan Bejakovic 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.