Synaptics (SYNA -1.56%) has held its ground impressively amid the novel coronavirus pandemic thanks to its diversified business, which relies on personal computers, smartphones, and the Internet of Things (IoT). Investors have kept their faith in Synaptics stock so far in 2020, and it looks like the trend is all set to continue given the company's latest quarterly results.
Known for making human interface solutions such as touchscreen controllers and display drivers, Synaptics beat Wall Street's fiscal fourth-quarter expectations. It also offered attractive guidance that should pave the way for more upside in this semiconductor stock, which is sitting on multiple catalysts, including 5G wireless network upgrades.
Synaptics is moving in the right direction
Synaptics' revenue fell 6% year over year in the fourth quarter of fiscal 2020 (which ended June 27) to $277.6 million, marginally beating analysts' expectations of $276 million. However, the company saw a steep rise in earnings during the quarter thanks to margin gains.
Synaptics' non-GAAP net income jumped from $0.38 per share in the year-ago quarter to $1.24 per share in the previous quarter, exceeding the $1.06 per share consensus estimate. This jump isn't surprising, as Synaptics' non-GAAP gross margin increased 7.8 percentage points annually to 46.9% during the quarter.
Synaptics credits this strong margin growth to its shift toward selling higher-margin products and exiting lower-margin businesses, as CEO Michael Hurlston pointed out on the latest earnings conference call:
We are more focused than ever before, divesting and exiting lower margin, more commoditized products such as mobile LCD TDDI [touch and display integration], and investing in more differentiated and higher margin solutions like OLED [organic light-emitting diode] touch, edge SoCs [System-on-a-chip products], and video interface.
The chipmaker was already sitting on multiple OLED design wins for flagship and mid-range devices that are expected to hit the market this year, and it seems to have added to that list. Hurlston said that Vivo and Oppo have selected Synaptics' products for their upcoming devices. And the company pointed out that sales of its LCD (liquid-crystal display) DDICs (display driver integrated circuits) were stable, as "our key customer recently launched their highly anticipated, low-end LCD smartphone last quarter, which has enjoyed widespread customer adoption."
Synaptics is likely referring to the recently launched iPhone SE, which has been selling well in an otherwise tepid smartphone market, indicating that Apple (AAPL -3.00%) is one of its customers. This partnership could translate into further gains for the chipmaker, as it has been touted to supply OLED drivers to this year's iPhones, all of which are expected to pack OLED displays.
Demand for Apple's upcoming iPhones is expected to be strong on account of a huge installed base of users waiting to upgrade to new devices. The addition of 5G capability to this year's models is expected to be another driving force for Apple's smartphone shipments. So Synaptics' smartphone business could get a nice shot in the arm in the second half of the year. The company anticipates 15% sequential growth in mobile this quarter, which should boost the company's overall revenue, as mobile is expected to account for 42% of the company's total revenue.
More reasons to go long
The PC business is expected to supply 26% of Synaptics' total revenue this quarter. This business is in good shape thanks to the shift toward remote working, which has led to a bump in demand for computers.
Synaptics' PC business is anticipated to clock sequential growth of 25% in the first quarter on the back of strong demand for consumer and commercial laptops. The company has strengthened its PC business by launching new video interface solutions that are being utilized by OEMs (original equipment manufacturers), along with other products such as dongles and docking stations.
And finally, the IoT business should also get better in the forthcoming quarters thanks to Synaptics' recent acquisition of Broadcom's assets. So Synaptics should start firing on all cylinders in the forthcoming quarters and accelerate its top-line growth.
The stock trades at 24.5 times trailing earnings, compared to a five-year average multiple of nearly 95. A forward price-to-earnings ratio of 16 indicates bottom-line growth. Investors looking for a stock to benefit from 5G and other tech trends should keep holding Synaptics, as it could deliver more upside.