Chipmaker Synaptics (NASDAQ:SYNA) started 2018 on a promising note after revealing a groundbreaking product in January that can help the company win big in the smartphone industry. However, the latest results for Synaptics, which specializes in human interface solutions, indicate that its product development efforts could take some time to bear fruit.
Synaptics recently released mixed second-quarter results. Its revenue fell 7% from last year to $430.4 million, missing the consensus estimate, though it beat the earnings estimate by $0.02 per share. The outlook wasn't great, either, as Synaptics' revenue could drop almost 10% year over year during the quarter including March, to $400 million.
And non-GAAP earnings per share could shrink to $0.90 as compared to $1.27 in the year-ago quarter. But investors have decided to overlook the tepid results and outlook, as evident from the 7% pop in Synaptics shares immediately after the results came out. So, why is Wall Street celebrating the company's poor showing?
1. The Internet of Things business is gaining traction
Synaptics recently created a new segment classifying revenue from consumer Internet of Things (IoT) product sales. This business is now supplying a quarter of the company's revenue. It isn't easy to calculate the year-over-year gains in this business because it didn't exist a year ago, but Synaptics has given some clues to that.
The consumer IoT business contributed $106.9 million in revenue last quarter. This includes $25.3 million that was formerly included in the mobile segment, which means that it brought in around $81.6 million in revenue from new IoT-related products.
The company's consumer IoT business that came into being after the acquisition of Conexant in June last year currently has an annual revenue run rate of just over $320 million. Synaptics had acquired audio solutions specialist Conexant for $343 million, estimating that this deal will enhance its total addressable market by as much as $2.8 billion by the end of the decade.
This means that the acquisition has already started making meaningful contributions to Synaptics' top line, and it could get even better in the long run because the company is attacking fast-growing niches. For instance, the Conexant acquisition helped Synaptics buy its way into Amazon's Alexa ecosystem. Conexant has collaborated with Amazon on audio development kits that can be used by manufacturers of smart speakers to integrate the Alexa Voice Service into their devices.
Harman is one of the latest companies to have selected Synaptics' audio solutions to power its smart-speaker family. Such design wins should continue boosting the chipmaker's consumer IoT business as sales of smart speakers are rising at a tremendous pace. Synaptics' IoT business can become a greater contributor to its top and bottom lines -- probably one of the reasons investors decided to overlook the company's weak performance last quarter.
2. Bright prospects in mobile
Synaptics revealed its in-display fingerprint sensor earlier this year in association with fast-growing Chinese smartphone vendor Vivo, which has become the world's first smartphone original equipment manufacturer (OEM) to launch a device that integrates the fingerprint sensor into the screen itself.
The Chinese company plans to start selling this Synaptics-enabled device very soon, and it could provide the much-needed catalyst for the chipmaker's mobile business.
Bears might argue that Apple's Face ID could spark a trend of Android smartphone manufacturers shifting to the facial recognition technology in place of fingerprint sensing. But it will be difficult for Android OEMs to source parts for facial recognition as Apple has moved swiftly to lock in the available supply for its own use. Moreover, the higher costs associated with facial recognition as compared to fingerprint sensors mean that there will be a market for the latter in the form of mid-tier smartphones.
It's not surprising to see that IHS Markit says the market for the touch and display driver integration products that Synaptics sells could jump from 100 million units last year to 654 million units in 2022.
All in all, Synaptics is correct in pursuing growth in fast-growing areas, which is why Wall Street remains upbeat about its prospects despite a tepid performance last quarter. In fact, a Yahoo! Finance analyst survey forecasts that the company's revenue will grow 5% in the next fiscal year after dropping 2.7% in the ongoing one. Investors should remain patient, since a turnaround in the company's fortunes could lead to more upside.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.