Synaptics (NASDAQ:SYNA) has been betting big on the Internet of Things (IoT) to make up for weakness in its mobile business, and to good effect. The chipmaker failed to make much headway in smartphones despite its best efforts to come up with cutting-edge products, so management decided to pursue emerging tech trends such as smart audio solutions.

The gamble has begun to pay off. Synaptics' financial fortunes are turning around, and the stock price has gained some momentum in the past three months. But that momentum will be put to the test when the chipmaker releases its fiscal second-quarter results on Feb. 7.

Can Synaptics trump expectations once again, or will it fall prey to broader semiconductor industry weakness? Let's find out.

Various components of the Internet of Things.

Image Source: Getty Images.

The headline numbers

Synaptics surprised investors three months ago with better-than-anticipated guidance, calling for revenue between $410 million and $440 million and EPS in the range of $1.25 to $1.55. If this guidance holds true, the company should easily beat Wall Street estimates, which are calling for $1.37 in earnings on $425 million in revenue if on average.

Synaptics' top line will remain flat on a year-over-year basis if it can hit $430 million in revenue, while earnings are set to increase impressively over the prior-year period's number of $1.11 per share. That's because the company anticipates a major bump in the margins this time thanks to a favorable product mix.

Synaptics expects non-GAAP gross margin of 38% to 39% in the second quarter as compared to 35.9% in the year-ago period, driven by its focus on premium smartphone, automotive, and IoT products. In all, investors can expect a solid quarterly report from Synaptics once again, though all eyes will be on the forward-looking guidance.

The guidance must be solid

Synaptics has done well to turn its business around over the past few months despite the broader weakness in the smartphone and semiconductor space. However, investors shouldn't forget that the company expects 65% of its second-quarter revenue to come from the mobile business as compared to 20% from IoT.

That looks like bad news for Synaptics at first, as JPMorgan expects smartphone sales to drop somewhere between 4.8% and 5.5% this year, following a 2.9% to 3.3% decline in 2018. But Synaptics has been smart to tag along with the likes of Huawei, a shining star in the otherwise gloomy smartphone sky.

Huawei is using Synaptics' display driver in the high-end Mate 20 Pro smartphone, allowing the Chinese company to make its device bezel-less thanks to the chipmaker's chip-on-film (CoF) display driver packaging tech. CoF enables smartphone makers to reduce power consumption, lower manufacturing costs, and deliver a higher resolution while occupying less real estate thanks to its lightweight and small structure.

Synaptics believes that the advantages of CoF technology make it ideal for deployment in smartphones with end-to-end displays. Not surprisingly, the company has more than 20 smartphone projects in production based on this technology already, so there's a possibility that Synaptics' mobile business won't be affected by the ongoing smartphone industry weakness.

The consumer IoT business, meanwhile, should continue being a pillar of strength for Synaptics. The company has stepped on the gas as far as IoT product development is concerned by shifting "a large portion of our investment dollars from in-display fingerprint to consumer IoT to enable stronger growth of IoT over the mid-term, which we believe will become more evident toward the end of our fiscal year," said Wajid Ali, senior vice president and CFO, on the Q1 2019 earnings call last November.

Synaptics has started sampling new IoT-focused solutions based on the 22-nanometer manufacturing process, while its smart audio solutions have been selected for deployment in smart TVs from TCL. Additionally, Synaptics has launched voice solutions for both new and legacy set-top boxes to add voice-assistant capabilities to TVs.

These new product deployments should help Synaptics accelerate the growth of its IoT business in future quarters and also help the company issue solid forward-looking guidance given the positive developments in mobile. That should be enough to boost Synaptics' stock higher post-earnings and set the stage for more upside.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.