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Up 78% This Year: Why This Tech Stock Still Looks Like a Buy

By Harsh Chauhan – Aug 16, 2021 at 2:15PM

Key Points

  • The Internet of Things business has supercharged Synaptics' growth and boosted gross margin.
  • Catalysts in the mobile business will be an added tailwind.
  • A cheap forward earnings multiple is enticing.

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This chip stock has crushed the market in 2021.

Synaptics (SYNA -2.08%) stock surged higher after the chipmaker eased past Wall Street's fiscal fourth-quarter expectations in early August, delivering sharp increases in revenue, gross margin, and earnings.

SYNA Chart

SYNA data by YCharts.

Shares of the company, whose chips are used in fast-growing verticals such as the Internet of Things (IoT) and mobile, jumped nearly 17% the day after the earnings report was released. Synaptics' strong showing isn't surprising, as the company was sitting on impressive catalysts.

However, investors who have missed Synaptics' explosive stock market run so far this year can still jump onto this bandwagon because its days of terrific growth are far from over. Let's see why.

Person using mobile phone to buy stock.

Image source: Getty Images.

Meet Synaptics' biggest growth driver

Synaptics' Q4 revenue jumped 18% year over year to $327.8 million, while adjusted earnings per share shot up 76% to $2.18. Wall Street analysts expected Synaptics to earn $2 per share on $324.7 million in revenue, but robust demand in the IoT business and a sharp increase in gross margin helped the company beat estimates. Synaptics exited the quarter with a non-GAAP gross margin of 57.5% -- a big improvement over the year-ago's 46.9% -- thanks to the steps taken by the company to move to a higher-margin model.

The IoT business produced half of Synaptics' total revenue last quarter. The segment's revenue shot up 143% year over year including the impact of acquisitions, while organic growth stood at a respectable 30%. The good part is that Synaptics' acquisition of Broadcom's wireless IoT business that was completed in July 2020 is delivering the goods for the chipmaker.

CEO Michael Hurlston said on the earnings conference call that the company has doubled its revenue in IoT applications like home automation, wearables, video-enabled doorbells, surveillance, and fitness. More importantly, the design wins scored by Synaptics in the IoT business should help sustain the impressive growth. Hurlston said:

Our best-in-class Wi-Fi 6 and Bluetooth combo chipsets are seeing great traction with customers designing new solutions or upgrading their existing products. We have also secured several new design wins with our GPS solutions, particularly in wearables. Given our pace of success, we see a path to doubling once more in the next 18 months.

Synaptics' margin is on track to improve further thanks to the dominant contribution from the IoT business, which is allowing the company to deliver "higher-value products" to its customers. The IoT business is expected to account for 51% of the total revenue this quarter and grow 65% year over year.

The company expects a non-GAAP gross margin between 52% and 53.5% in fiscal Q1, a big increase over the year-ago's 41%. As a result, Synaptics' earnings are projected to increase from $1.85 per share a year ago to a range of $2.45 to $2.75 per share in the current quarter. But Synaptics has an additional catalyst on the way that could help it exceed expectations.

The mobile business is about to step on the gas

Synaptics' mobile business produced 24% of the company's revenue in Q4. The segment's sales were down 35% year over year because the company divested its mobile LCD TDDI (touch/display integration) business in April 2020 due to its low margin profile.

Now that the year-over-year impact of the divestment is in the rearview mirror and Synaptics is focusing on the higher-margin organic light-emitting diode (OLED) unit, the mobile business is set to return to growth. Synaptics management pointed out that the company's second-generation OLED touch controller is now in volume production, with the third-generation controller set to be rolled out soon.

Synaptics was reportedly on track to supply OLED touch controllers to Apple for the iPhone 12, and the company had indicated last year that it had indeed won the contract. Given that its second-generation OLED touch controller is already in volume production, there's a possibility that Synaptics may be supplying chips to Apple once again.

That could be a big win for Synaptics, as supply chain rumors indicate that Apple may initially produce 90 million units of this year's iPhone models, up from 75 million units of the iPhone 12. Throw in the fact that Synaptics has scored new design wins to supply its OLED controllers to Korean and Chinese smartphone original equipment manufacturers (OEMs), and the mobile business looks set to break out.

All of this makes Synaptics a growth stock to buy right now, especially considering that it is trading at just 17 times forward earnings versus the S&P 500's multiple of 31.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Broadcom Ltd and Synaptics and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

Synaptics Stock Quote
$97.91 (-2.08%) $-2.08
Apple Stock Quote
$144.74 (-1.29%) $-1.89
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,965.09 (-0.84%) $-33.75
Broadcom Limited Stock Quote
Broadcom Limited

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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