It is difficult to find much fault with Tigress Financial analyst Ivan Feinseth, who recently downgraded Synaptics (NASDAQ:SYNA) from a "strong buy" to "buy" citing reduced upside potential. Synaptics shares have run up close to 70% in 2014, and since June 11, they are up more than 30%. The chipmaker has gained handsomely in the last 30 days after it announced its acquisition of Renesas SP Drivers, a Japanese company that makes display driver chips for mobile devices. In addition, Synaptics now trades at a rich earnings multiple of 55.
However, we need to look beyond the valuation. Synaptics believes that this acquisition will increase its addressable market by 1.5 times, and also "accelerate its product roadmap for touch-and-display driver integration." But what's more enticing is that fact that Synaptics might now become a supplier to Apple (NASDAQ:AAPL).
Brace for impressive earnings growth
As Fool analyst Steve Symington pointed out, Renesas is the "sole supplier" to Cupertino for display driver chips used in the iPhone. This is a huge opportunity in itself, as a spot in the next iPhone can add $160 million to Synaptics' top line by year-end. It is expected that Apple might ship 80 million units of the iPhone 6 this year itself, and it is assumed that the display drivers carry an average selling price of $2, resulting in the $160 million figure.
Stern Agee is even more optimistic. The analyst firm is of the opinion that by March 2014, Renesas will get $320 million in revenue from Apple if 160 million iPhones are shipped (including the current generation). Clearly, the acquisition is a lucrative one for Synaptics, and has the potential of adding $1.50 to its earnings per share in fiscal 2016, according to Stern Agee.
Synaptics has bought Renesas at a great price, and in doing so, it has diversified its customer base. The company's fingerprint business is already doing well, and it could lead to additional earnings of $2.50-$3.00 per share over the next couple of years, while the core touch business is expected to generate earnings of $3.50-$4.00 per share, according to Needham.
Clearly, Synaptics' earnings are expected to go supersonic in the next couple of years, putting in a remarkable improvement over the trailing twelve months' EPS of $1.59. As such, investors shouldn't worry about the valuation. The company's forward P/E is quite reasonable at 18, and it shouldn't have much difficulty in attaining it because it is enjoying enough tailwinds to achieve the expected earnings growth.
More catalysts: Samsung and China
Apple is not the only big story here. Synaptics has earned its stripes by supplying fingerprint sensors to Samsung (NASDAQOTH:SSNLF), with the Galaxy S5 being its most notable win. Now, it is expected that the company will also supply fingerprint sensors for the next Galaxy Note phablet. As reported by AndroidHeadlines, Samsung might use an area-type fingerprint sensor for the Galaxy Note 4, a solution that Synaptics has already started sampling with customers.
On the last earnings call, Synaptics said that it expects to roll out its area-type sensor into the market in the second half of the year. This coincides with the Galaxy Note's launch timing of around September. Hence, Synaptics seems to be increasing its clout inside Samsung's high-end devices. This is great news for Synaptics investors, as Samsung is estimated to sell around 126 million high-end smartphones in 2014, leaving aside South Korean company's budget offerings.
So, Synaptics will now be supplying its chips to the two biggest smartphone makers in the world. But, the company has another catalyst in the form of China, where it has relationships with several companies to tap the fast-growing smartphone market. The likes of Lenovo, Huawei, ZTE, Gionee, and Coolpad are on Synaptics' client list.
Some of these companies might not be well-known globally, but they are big in China. Coolpad, for instance, commands a bigger share than Apple in the Chinese market, while Samsung and Lenovo occupy the top two positions. This year, smartphone shipments in China are expected to grow to 422 million units from 354 million last year, according to Canalys. As such, Synaptics will find growth over here as well because it counts the major smartphone players in the country as customers.
Synaptics can run higher even after putting in a masterful performance so far this year. It has got some big tailwinds to count on -- Apple, Samsung, and the Chinese smartphone market. Moreover, the Renesas acquisition looks like a solid fit for its business. Synaptics will now be able to offer an integrated touchscreen and display driver solution, which might help it land more design wins. As such, investors should continue holding the stock as it hasn't run out of fuel yet.
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.