Shares of Synaptics Inc (SYNA -2.60%) have rewarded investors handsomely over the past year. The company's shift from the commoditized smartphone chip business to the Internet of Things (IoT) has worked wonders, leading to a sharp increase in margins and earnings, which has translated into terrific stock market gains.
Investors who have missed the Synaptics gravy train so far shouldn't be disappointed; the chipmaker has strong catalysts that could help it sustain its stock market momentum. However, it may be a good idea to buy Synaptics before its fiscal 2022 first-quarter earnings report that will be released after the bell on Nov. 4. A strong set of numbers and robust guidance could make this tech stock expensive.
Let's look at the reasons Synaptics remains a top growth stock to buy right now even though it has more than doubled in the past year.
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Synaptics can crush expectations once again
According to Synaptics' guidance issued in August 2021, it expects Q1 revenue of $370 million and adjusted earnings of $2.60 per share. Wall Street's expectations are in line with Synaptics' guidance, so don't be surprised to see the company continue its streak of beating consensus estimates. Synaptics has beaten Wall Street's earnings estimates comfortably in each of the past four quarters, a trend that's likely to continue thanks to the strong demand for its chips.
CFO Dean Butler pointed out that Synaptics' customer demand has surpassed the company's supply. However, during the August earnings conference call management stated that it had at least 90% of the backlog coverage for the full fiscal year revenue guidance for 2022. This indicates that Synaptics could end the year with a stronger financial performance than anticipated thanks to the strong inflow of orders.
Analysts expect Synaptics' revenue to increase 11.6% this fiscal year to $1.5 billion, while earnings are expected to jump to $10.08 per share from $8.26 per share in fiscal 2021. For the fiscal first quarter, its revenue could increase nearly 13% year over year at the midpoint of its guidance range, while adjusted earnings are on track to increase 40.5% year over year. The company's adjusted gross margin is expected to land between 57% and 58% as compared to 49.7% in the year-ago period.
A closer look at the major catalysts Synaptics is sitting on tells us that its performance could keep getting better as the year progresses.
Sustained growth is in the cards
The IoT business is Synaptics' biggest source of revenue. It is expected to account for 51% of the company's top line in Q1. It is worth noting that Synaptics' IoT revenue increased 143% year over year in the fourth quarter of fiscal 2021, while the full-year revenue from this segment was up 83%.
The IoT business can keep growing at such a rapid pace considering the design win activity that Synaptics has recently reported. For instance, the automotive vertical can play an important role in the IoT business' growth as Synaptics' display and touch solutions have gained wide acceptance. There are over 20 automotive original equipment manufacturers spread across the U.S., Europe, and Asia either using its chips or having approved them for use in 45 car models.
The automotive vertical is expected to clock $100 million in annual revenue this fiscal year for Synaptics, which would be nearly a year ahead of the company's original target. Meanwhile, Synaptics sees IoT revenue from verticals such as home automation, surveillance, video doorbells, wearables, and fitness-related applications doubling over the next 18 months.
All of this indicates that Synaptics' biggest business can continue to move the needle in a big way for the company. Throw in the positive momentum in the mobile and PC businesses that account for the rest of the company's revenue, and investors have more reasons to buy this company that's expecting annual earnings growth of 15% over the next five years. For comparison, Synaptics' earnings have contracted at an annual rate of nearly 9% over the last five years.
With the stock trading at just 17 times forward earnings compared to the S&P 500's forward earnings multiple of 23. Investors looking to get into a growth stock should consider Synaptics before its upcoming earnings report gives it a boost.
