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Synaptics Gets Slammed

Last week I wrote a piece on how price targets mean nothing. I used Synaptics (Nasdaq: SYNA  ) as an example after Bear Stearns downgraded the technology company on speculation it would lose its lucrative contract with Apple (Nasdaq: AAPL  ) . Since neither Synaptics nor Apple has commented on the rumor, it has left investors understandably concerned and owning a stock substantially less valuable than before. A 40% tumble. Ouch.

Now several investment firms have followed with downgrades of Synaptics after Apple introduced a new touchpad (TrackPad) using chips from Cypress Semiconductor (NYSE: CY  ) for its PowerBook notebooks. That fueled the speculation Apple will use the same solution in the next generation of iPods. If true, Synpatics stands to lose a substantial portion of its business with Apple over the next year.

Earnings estimates have also been trimmed for 2005 by a penny to $1.12 per share, while 2006 and 2007 earnings estimates were cut by 27%. As a result the price targets were slashed by nearly 50%. (These are the same analysts who raised the price targets on the stock just a month ago.) And if you own the stock you know what the result was: a falling knife that has yet to see a bottom.

Readers have asked me, "When is speculation the real news?" and "Could this be overblown?" Those are Foolishly good questions, and they deserve equally Foolish answers.

The speculation is in fact the news driving the stock price down and reflects a gloomy scenario. But is it justified? Investors should keep in mind there is no current evidence to suggest Apple is completely eliminating Synaptics as a supplier. So it raises the question, "Is it responsible for analysts to report speculation as factual news knowing the negative impact it would have on the stock price?" And what if it turns out to be not as bad as first thought? Too bad. The stock has already taken the hit.

If Apple indeed plans to use another technology for its iPods, then yes, this would have a significant impact on Synaptics' bottom line. Yet Apple could still use a combination of its own in-house solution and the TouchPad technology. In that case, Synatpics would likely retain some 40% to 50% of the iPod business.

So is Synaptics a buy now?

A Foolish investor would answer that question based on the knowledge of the company's fundamentals and long-term growth perspective. Let's take a look at what we know to be true.

Despite the potential loss of Apple, Synaptics' user interface technology is still used by seven other portable music player makers including Creative Technology (Nasdaq: CREAF  ) and Samsung and has 55% market share in the notebook computer market. But it doesn't stop there. The next market the company plans to incorporate its TouchPad technology in is in mobile phones.

Now with reduced estimates of $1 per share for 2006, Synaptics trades with a forward price-to-earnings ratio of 23. But the P/E isn't the only factor to consider. It is what the earnings growth will be over the next two to three years, and Synaptics plans to expand its business (if it were to lose the iPods) to other markets. We won't know the details until the company issues some guidance. So for the time being this Fool wouldn't panic and will take a wait-and-see attitude.

For more of my Foolishness, check out Synaptics Has the Right Touch.

Fool contributorKelvin Taylor does not own shares of any of the companies mentioned.

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Synaptics, Inc. CAPS Rating: ****