Goldman Sachs estimates that the Fed could hike interest rates four times in 2022. This expectation has weighed on tech stocks in the new year -- higher interest rates will make bonds more attractive, while rising inflation may dent high-growth tech companies' prospects due to higher borrowing costs.
It's not surprising to see some of the top tech stocks that crushed the broader market handsomely in 2021 take a beating this year. Shares of Synaptics (SYNA +0.30%), for instance, had shot up 200% in 2021, but the stock has been down big time in 2022 so far.
However, the steep drop in Synaptics stock is a buying opportunity for savvy investors looking to take advantage of emerging tech trends such as the metaverse. Let's look at the reasons why Synaptics looks like an attractive metaverse stock to buy right now.
Synaptics could power a key metaverse device
Augmented reality (AR)- and virtual reality (VR)-enabled head-mounted displays are going to open the window to the metaverse for millions of users around the globe. That's because an AR/VR headset, or smart glasses, can transport a consumer into the virtual world where they can play, work, learn, or collaborate with other metaverse users.
Synaptics is one of the companies that make chips to power these AR/VR headsets. The company says that it "provides an end-to-end VR portfolio" that connects the graphics processing unit, the mobile processor, and the dual displays in a head-mounted device using a high-speed network. Synaptics also offers audio technology to power the AR/VR headsets.
Image source: Getty Images.
The AR/VR headset market is currently in a nascent stage. However, market research firm IDC predicts shipments of AR/VR headsets will jump to nearly 44 million units in 2025 compared to 9.7 million units in 2021. The metaverse could unlock a new growth opportunity for Synaptics, especially considering that the company has supplier relationships with some big names in this space.
Synaptics management had pointed out on its November 2021 earnings conference call that it is looking to leverage its expertise in mobile display drivers in the virtual reality market. More importantly, CEO Michael Hurlston said that the company is enjoying impressive growth in the virtual reality market already:
We are seeing incredible traction in this area, with over 30 models shipping today using Synaptics' devices, including the market leader who recently announced a $10 billion investment in this technology area. Synaptics is shipping today in almost all the leading virtual reality platforms, and we enjoy undisputed market share leadership in this category.
This is an indication that Synaptics may be supplying its chips to Meta Platforms (FB +0.73%), as CEO Mark Zuckerberg had said on the company's October 2021 earnings conference call that the social media giant would be investing $10 billion into AR and VR products. A relationship with Meta could be a big deal for Synaptics. Its Oculus Quest 2 headset had reportedly sold 10 million units by November 2021, taking just over a year since launch to hit that mark.
Synaptics is one of the companies driving the early adoption of the metaverse. The company's claims of powering several AR/VR headsets indicate that it could win big from this emerging technology trend in the long run.
More reasons to bet on this potential metaverse winner
Synaptics could end up supplying chips to another key player in the AR/VR headset market. There are rumors that Apple (AAPL +0.96%) is reportedly developing two generations of AR/VR headsets that could be launched over the next couple of years, with the first one anticipated to hit the market in 2022, according to noted analyst Ming-Chi Kuo.
Kuo estimates that Apple could ship 2.5 million units to 3.5 million units of its first-generation headset next year, while its second-generation headset could hit 10 million units in shipments. Synaptics is a supplier to Apple, as the latter's iPhones use OLED (organic light-emitting diode) touch controllers from the chipmaker.
This was a key reason why Synaptics' mobile revenue had increased 19% sequentially in the quarter that ended in September when the company's design wins started shipping in smartphones, driven by the ramp-up in the production of the latest iPhone generation. So, Synaptics could win another big AR/VR headset customer thanks to its existing Apple relationship and the former's proven expertise in this space.
Additionally, investors shouldn't forget that Synaptics is already benefiting big time from the Internet of Things space. The demand for its chips is growing rapidly, and the metaverse could act as an additional catalyst for the chipmaker. All this makes Synaptics a top tech stock to buy right now as it is trading at just 25 times forward earnings, which is a slight discount to the NASDAQ-100's forward earnings multiple of 28.
