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A Stunning Comeback Has Made This Tech Stock Worth Buying

By Harsh Chauhan – Dec 4, 2019 at 10:22AM

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A couple of big catalysts could send this chipmaker's stock higher.

It wasn't long ago that Synaptics (SYNA 0.19%) was struggling on account of executive turnover and huge declines in its top and bottom lines. But all of a sudden, the chipmaker is looking like a top tech stock after its latest round of results.

Synaptics delivered a massive earnings surprise in the first quarter of fiscal 2020. Its earnings per share of $1.22 crushed Wall Street's $0.73 estimate. Management credited the launch of new products by customers for this impressive beat. According to CEO Michael Hurlston, "Our September quarter was stronger than expected, as we had a number of successful large OEM customer product launches this quarter, including smart home devices leveraging our edge computing SoCs [system on a chip], and new smartphones with both LCD and OLED panels featuring our display and touch IC [integrated circuit] solutions."

Not surprisingly, Synaptics stock surged as the company's latest results indicate that it is firmly on the path to a turnaround. But should investors take the plunge and go long on Synaptics based on last quarter's performance? Let's find out.

Person pressing the buy botton.

Image source: Getty Images.

Synaptics is getting better

Synaptics' Q1 revenue fell 18.6% from the prior-year period. But the good news for investors is that the company's top-line performance will improve slightly in the current quarter. Synaptics expects $355 million in Q2 revenue at the midpoint of its guidance range, a drop of 16.4% from the year-ago period and an increase of 4.4% sequentially.

More importantly, Synaptics anticipates non-GAAP (adjusted) gross margin between 40.5% and 42.5%. That would be a big improvement over the prior-year period, when the non-GAAP gross margin came in at 38.9%. This improvement can be credited to Synaptics' focus on high-margin products in both the mobile and personal computer businesses.

In the mobile business, for instance, the industry's shift toward OLED displays has led to an increase in demand for more complex chips. As Hurlston pointed out over the latest earnings conference call, "We continue to win with our advanced touch controller ICs for premium OLED smartphones with Tier 1 mobile OEMs [original equipment manufacturers] due to our superior performance and differentiating features."

Synaptics claims that it is witnessing strong design win traction at tier 1 smartphone OEMs. A Chinese manufacturer has already deployed its touch controller and display driver in a pen-enabled smartphone sporting a flexible OLED display, and the growing adoption of this display technology could be a tailwind for the chipmaker.

According to a third-party estimate, the market for flexible OLED displays is predicted to clock a compound annual growth rate of nearly 40% from 2019 to 2024, primarily driven by smartphones. So Synaptics could be sitting on a big opportunity over here that could help sustain its turnaround in the long run.

Meanwhile, Synaptics is expecting a sustained turnaround in the PC business as well thanks to a bump in demand for touchpads and fingerprint sensors. The company has already scored design wins at key PC OEMs such as HP, Lenovo, and Dell. This bodes well for Synaptics, as laptop shipments are expected to go north in the coming years.

According to sources compiled by Statista, laptop shipments are expected to hit 171 million units in 2023 as compared to 162.3 million shipments at the end of last year.

As Synaptics' mobile and PC businesses together supply 75% of the company's total revenue, the secular growth opportunities in both these markets bode well for the chipmaker.

Should investors buy?

Now that Synaptics has shown signs of a turnaround last quarter, investors might be wondering if the stock remains a buy after its latest pop. The good news for investors is that the chipmaker remains relatively cheap despite its rally.

"Relatively" because Synaptics' trailing price-to-earnings (P/E) ratio of nearly 52 is significantly below the five-year average multiple of nearly 87. But on a forward earnings basis, Synaptics seems quite cheap with a multiple of only 15. The low forward P/E is indicative of the earnings growth that Synaptics is anticipated to deliver thanks to its focus on high-margin products.

On a trailing-12-month basis (including the first quarter of fiscal 2020), Synaptics has reported a small loss of $0.67 per share. Analysts expect the company to deliver earnings of $4.05 per share this fiscal year, which would be a slight improvement over the EPS of $4.00 Synaptics clocked in fiscal 2019.

It shouldn't be very difficult for Synaptics to hit the bottom-line target for this year given the favorable factors listed above. So investors can consider going long, as Synaptics' recent turnaround looks like the beginning of a lasting trend.

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.

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