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This Tech Stock Could Be a Top Growth Pick This Year

By Harsh Chauhan - Feb 16, 2021 at 9:53AM

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This chipmaker should benefit from terrific growth in the Internet of Things segment -- and its mobile businesses.

Synaptics (SYNA 3.81%) looks all set to break out in 2021 on the back of impressive catalysts in the mobile and Internet of Things (IoT) businesses, and its latest fiscal 2021 second-quarter results indicate that it is not going to disappoint.

Share prices for the human interface solutions supplier soared in the double-digit percentages after it released its quarterly report. The company beat Wall Street's expectations and issued solid guidance. Let's take a closer look at what's working for Synaptics, and why the stock could zoom higher as the year progresses.

Synaptics is pulling the right strings

Synaptics' revenue fell 8% year over year in the fiscal second quarter to $358 million, while non-GAAP earnings jumped to $2.30 per share from $2.04 per share in the prior-year period. The company's top line declined, but largely because its prior-year period's revenue included a contribution from the mobile LCD TDDI business that it divested in 2020.

Hand drawing stock chart return.

Image source: Getty Images.

Synaptics moved away from that business because of its lower margins. Smartphone OEMs (original equipment manufacturers) are shifting toward OLED (organic light-emitting diode) displays, and this is a higher-margin business for the chipmaker. Not surprisingly, Synaptics non-GAAP gross margin shot up to a record 52.1% in the fiscal second quarter, compared to 42.9% in the year-ago period, exceeding the higher end of its own guidance range.

Synaptics' gross margin has increased for six straight quarters now, and it isn't done growing yet: The chipmaker projects non-GAAP gross margin between 51.5% and 53.5% in the fiscal third quarter, a big improvement over the prior-year period's figure of 44.1%.

Adjusted earnings are expected to fall between $1.75 and $2.05 per share, which would be a nice jump over the year-ago period's earnings of $1.49 per share, and the top line is expected to remain nearly flat year over year at the midpoint of Synaptics' guidance range of $310 million to $340 million. What's even better is that Synaptics looks capable of sustaining such improvements over the long run by capitalizing on favorable trends in IoT and mobile.

More gains are in the cards

Synaptics' IoT business has stepped on the gas lately. It accounted for 43% of the company's total revenue last quarter, compared to 23% in the year-ago period, and the segment's revenue jumped 74% year over year to $155 million. Synaptics pointed out that "new programs began to scale up across our entire IoT portfolio."

Investors can expect that momentum to continue as the company has been scoring more design wins across various segments, including automotive, consumer, industrial, and enterprise for its IoT chips. Synaptics has built a pipeline of design wins spanning 13 automotive OEMs, which it believes will help it achieve $100 million in annual revenue from this segment within the next three years.

All in all, Synaptics struck a positive note about its IoT business during the latest earnings conference call. President and CEO Michael Hurlston explained:

We anticipate the overall market for IoT will continue to grow at a 10% to 15% [compound annual growth rate] for the next few years. Based upon the strength of our design pipeline and potential share gains, driven by a strong product road map, we believe we have the opportunity to grow at least in line, but most likely outpace the overall market.

As such, IoT will continue to play a key role in driving Synaptics' growth over the long run, though there are additional catalysts that investors shouldn't miss out on. For example, the mobile business, which accounted for 31% of the company's revenue last quarter, has also been firing on all cylinders since the introduction of Apple's latest iPhones.

That tailwind is here to stay, as Apple's iPhone 12 line-up is in hot demand and the smartphone giant is expected to record a nice spike in shipments this year. More importantly, Synaptics has been scoring design wins at Android OEMs as well. Hurlston added on the conference call that:

In addition, as flexible OLED displays become increasingly prevalent, we secured multiple new wins for our on-cell touch solution with all the leading Chinese handset OEMs. I'm also excited to announce that while we've engaged with a large Korean handset OEM on multiple opportunities, we have now secured our first win, and initial shipments are expected to begin in the fall.

Analysis firm Mordor Intelligence predicts that the flexible OLED display market could clock a compound annual growth rate of nearly 40% through 2026, indicating that Synaptics' design wins should be able to keep its mobile momentum going.

All of this indicates that Synaptics won't be taking its foot off the gas. What's more, Synaptics trades at less than 30 times trailing earnings, which is much lower than its five-year average price-to-earnings (P/E) ratio of over 94. A forward P/E ratio of 17 points toward a stronger earnings profile, which isn't surprising as analysts expect sharp growth in the company's bottom line in the future.

As such, investors looking for a growth stock at a reasonable valuation should consider buying Synaptics, as multiple catalysts could send it higher.

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