Shares of Synaptics (SYNA 4.19%) got a much-needed shot in the arm after the company's third-quarter fiscal 2017 results easily bested Wall Street's expectations. The human interface solutions provider's revenue jumped 10% year-over-year (to $444.2 million), translating into $1.27 per share in earnings. By comparison, analysts were expecting $1.20 per share in earnings on $430 million in revenue.
Synaptics' results were warmly received, and the stock shot up 6% during the post-earnings action, bringing relief to investors amid speculation that the company could lose business from Apple (AAPL 3.07%). More importantly, CEO Richard Bergman provided clarity about the company's next big growth driver -- edge-to-edge smartphone displays -- where Synaptics is trying to lead the field with its product development moves.
Why edge-to-edge displays could be a big deal for Synaptics
The display of Samsung's latest flagship smartphone, the Galaxy S8, covers the front of the device almost entirely. This has led to the elimination of the home button, which traditionally houses the fingerprint sensor to unlock the device.
Samsung had been collaborating with Synaptics to integrate the fingerprint scanning technology into the display, but it wasn't ready in time for deployment into the Galaxy S8. Instead, Samsung had to place Synaptics' fingerprint sensor at the back of the device, near the camera, just before the device went into production.
Industry sources are reportedly blaming Synaptics' delayed development for Samsung's last-minute change. But it's really no surprise it wasn't ready.
The semiconductor specialist currently has the "only workable solution" to integrate the fingerprint scanner into the touchscreen, per Cowen analyst Timothy Arcuri. And Synaptics' FS9100 optical fingerprint sensor -- which can scan fingerprints through 1mm of glass -- was only launched in December 2016. Synaptics started sampling it to customers in the first quarter this year and the company had indicated that mass production would begin only in the second quarter. So people shouldn't have expected the sensor to be in the Galaxy S8.
However, Cowen forecasts that Samsung's next Note device will be the first one to sport the touch and display integration (TDDI) while Korean news publication The Bell's unnamed sources confirm the same. Samsung is expected to launch the next Note in the second half of the year, giving Synaptics enough time to ramp up production of the integrated sensor.
Synaptics' product lead in this market and its Samsung partnership will play a crucial role in capturing a bigger share of the TDDI space. IHS Markit forecasts that TDDI chip demand will jump to 654 million units in 2022 compared to this year's projected shipments of 100 million units. Synaptics is one of just three companies in this space, and is the only one to have licensed its intellectual property to display panel makers.
Will Apple use Synaptics' solutions?
Leaked specs of what purports to be the next iPhone's case molding (via Slash Leaks) indicates that Apple won't go the Samsung route by placing the Touch ID on the back of the device. Instead, it could integrate the device into the rumored OLED display and remove the iconic home button in the process.
But an Apple move toward TDDI doesn't guarantee Synaptics a slot inside the device, as Cupertino has been reportedly developing an in-house display and fingerprint sensor integration technology. Motley Fool contributor Ashraf Eassa believes it highly unlikey that the iPhone maker bought AuthenTec to build Touch IDs in-house for just a few iPhone models.
This makes sense, and indicates that Apple could be developing its own system. However, Synaptics can still hope for a spot if Apple's product development falls behind schedule. But investors shouldn't worry too much even if the chipmaker doesn't land a spot in the next iPhone thanks to the end market's secular growth.
As mentioned earlier, sales of TDDI chips are estimated to boom in the long run, and Synaptics is probably the best-positioned company to take advantage of the opportunity. This is because Apple is unlikely to license its technology to other smartphone companies, using it exclusively for its iPhones. Japan Display, the other operator in this space, is primarily a flat-panel display provider, so it might find it difficult to license its technology to rival display makers.
Synaptics, therefore, is sitting on a huge opportunity that could give its revenue a nice boost in the long run.