Micron Technology (NASDAQ:MU) and Synaptics (NASDAQ:SYNA) did well in 2020, as shares of both companies rose nicely despite a big correction in March due to the novel coronavirus pandemic. However, their gains fade in comparison to the broader market's rise.
As the chart below shows, Micron and Synaptics underperformed the tech-heavy NASDAQ-100 Technology Sector index in 2020. But it will not be surprising to see the two companies step up their game in 2021 and beat the market handsomely, as they are likely to win big from several catalysts, one of which should be a sharp spike in sales of 5G smartphones. Here's more about why these 5G stocks will outperform in 2021.
Micron Technology's mobile business could take off in 2021
Micron Technology stock has gained impressive momentum of late thanks to improving demand for memory chips across the board. The chipmaker recently increased its guidance for the first quarter of fiscal 2021 that points toward a top-line jump of 12% and an earnings bump of 48% over the prior-year period.
Micron management cited multiple catalysts that encouraged it to enhance its guidance, including huge demand from data centers that are requiring a lot of memory chips to tackle the increased usage of cloud services. However, the company made special mention of 5G wireless technology and the mobile market in a recent webcast.
That's not surprising, since the mobile business supplies close to 27% of Micron's overall revenue and didn't do well last year. Revenue was down 11% from the prior year to $5.7 billion as the novel coronavirus pandemic hurt smartphone sales. But there were signs of a turnaround in the final quarter of the fiscal year as revenue went up 4% year over year.
Now, 2021 could turn out to be a much better year for Micron's mobile business, as sales of 5G smartphones are expected to grow strongly. The chipmaker estimates that 500 million 5G smartphones could be sold in the new year, as compared to 200 million units in 2020. The good part is that Micron is well-placed to take advantage of this rapid growth.
The company claims that it "achieved a record number of design wins in fiscal Q4" in its mobile business. According to CEO Sanjay Mehrotra, "In mobile, Micron is well-positioned to win in the 5G era as a supplier to all the major smartphone manufacturers, with an outstanding portfolio of industry-leading low power DRAM and managed NAND solutions."
As it turns out, Micron is supplying dynamic random access memory (DRAM) chips to Apple (NASDAQ:AAPL) for the iPhone 12 models. The iPhone 12 is reportedly using a 4GB variant of Micron's LPDDR4 RAM, while the iPhone 12 Pro is rocking a 6GB configuration. This alone could give Micron's mobile business a big lift; the iPhone 12 lineup has turned out to be a big hit, and Apple is expected to move record units of the device next year.
As a result, Apple is reportedly looking to enhance iPhone 12 production to the tune of 30% in the first half of 2021. This would be a big catalyst for the mobile business, though investors shouldn't forget that this is not the only growth driver for this segment.
According to Micron, 5G smartphones are expected to sport bigger memory sizes. So, the chipmaker will benefit from a mix of higher unit sales and more content per 5G smartphone. Another important thing to note is that Micron is making impressive product development moves to ensure that it doesn't miss the 5G gravy train by designing memory chips that will have lower power consumption and deliver faster performance.
Coupled with other catalysts such as increased demand for computing and data center chips, 2021 looks set to be a strong year for Micron Technology, which could fire on several cylinders.
Synaptics has sunny days ahead
Just like Micron, Synaptics is also expected to benefit from a secular growth trend triggered by the launch of 5G smartphones. Semiconductor industry bellwether Applied Materials recently pointed out that over 70% of the 5G smartphones that have been launched so far come equipped with organic light-emitting diode (OLED) screens. The company also believes that "foldable OLED handsets [are] approaching a price point that could spur volume adoption."
This should bode well for Synaptics, as the company sells OLED display drivers to well-known smartphone OEMs such as OnePlus and Oppo. Additionally, there is a strong chance that Synaptics is supplying its OLED touch controllers to Apple. The chipmaker pointed out on its November earnings conference call that a "major handset OEM announced their new flagship phones last month powered by our OLED touch controller."
This seems like a clear reference to Apple, as the iPhone 12 was introduced in October 2020. So, Synaptics' mobile business that produced 40% of its total revenue last quarter looks all set to step on the gas thanks to higher iPhone 12 production. But this won't be the only catalyst for Synaptics; the company anticipates 10 new smartphones equipped with its OLED touch controllers to hit the market in the coming months.
More importantly, the global OLED market is expected to clock a compound annual growth rate (CAGR) of almost 22% over the next few years, as per third-party estimates. This indicates that Synaptics could keep growing at impressive rates over the long run, and that would also bode well for the company's bottom line as OLED drivers are a high-margin business.
Synaptics has been able to significantly boost its margins over the years, which has translated into improved bottom-line performance. Higher sales of OLED display drivers, thanks to 5G handsets, should ideally help Synaptics keep up its margin growth momentum.
Not surprisingly, Synaptics' earnings are expected to grow at double-digit percentage rates in the coming years, according to analyst estimates compiled by Yahoo! Finance. That's why it would be a good idea to buy shares of Synaptics right now since they trade at an attractive multiple. The stock has a trailing price-to-earnings (P/E) ratio of 27, which is well below the stock's five-year average multiple of 94. Meanwhile, its forward P/E multiple sits at just 12.5, indicating that Synaptics' earnings are expected to grow at an impressive pace.
Just like Micron Technology, Synaptics looks all set to step up its game in the coming year. More importantly, the momentum that it is enjoying right now may last beyond 2021 given the potential growth of the mobile market, as well as strong catalysts in the PC (personal computing) and Internet of Things (IoT) businesses.