Share prices of Synaptics (SYNA 0.17%) are down 55% in 2022 amid the broader stock market weakness, but one look at the chipmaker's terrific string of quarterly results should tell you that buying this technology stock is a no-brainer right now.
Synaptics' chips are primarily used in Internet of Things (IoT) applications, in addition to smartphones and personal computers (PCs). The company's reliance on the IoT market is the reason why it has been clocking terrific growth quarter after quarter.
A similar story unfolded when Synaptics released fiscal 2022 fourth-quarter results (for the three months ended June 25) on Aug. 4.
Healthy IoT chip demand is powering Synaptics' growth
Synaptics reported fiscal Q4 revenue of $476.4 million, an increase of 45% over the prior year. The IoT segment accounted for 70% of the chipmaker's top line last quarter. The 87% year-over-year revenue growth in Synaptics' IoT revenue allowed it to offset the weakness in the PC and smartphone markets. More specifically, Synaptics' mobile revenue fell 4% from the year-ago quarter, while PC revenue was down 3% year-over-year.
The chipmaker's non-GAAP earnings increased 77% year over year to $3.87 per share. The stronger growth in Synaptics' bottom line can be attributed to the company's improved margin profile. It reported adjusted gross margin of 61% for the quarter, up from 57.5% in the prior-year period. Synaptics' fiscal 2022 gross margin stood at 60%, a major improvement over last year's figure of 53.6%.
It is worth noting that Synaptics' gross margin was just 38.8% in fiscal 2019, but the company's shift to higher-margin IoT chips has worked wonders for its earnings growth over the past three years. What's more, Synaptics is set to increase its reliance on the IoT segment further in the current quarter. It expects IoT to account for 74% of its top line in the first quarter of fiscal 2023.
This explains why Synaptics delivered healthy guidance for fiscal Q1. It expects $3.35 per share in adjusted earnings on $455 million in revenue at the midpoint of its guidance range. Those numbers point toward 22% revenue growth and a 25% jump in earnings per share over the year-ago quarter.
The year-over-year growth that Synaptics is promising is impressive considering that nearly a quarter of its business is affected by weak sales of smartphones and PCs. For instance, the company's mobile revenue is expected to drop 40% year over year this quarter. However, multiple growth drivers within the IoT business should be enough to offset the weakness in smartphones and PCs.
Synaptics sees 60% year-over-year growth in IoT revenue this quarter. The company sells its IoT chips into many fast-growing niches, such as automotive, wireless connectivity, and virtual reality, and it is witnessing impressive traction in these markets. In wireless connectivity, for example, Synaptics' Wi-Fi 6 chips are being deployed by the likes of Alphabet's Google.
Synaptics says that it is ramping up the production of its Wi-Fi 6 chips with "several large OEMs" (original equipment manufacturers). This puts the company in a nice position to take advantage of the global Wi-Fi 6 market, which is expected to grow at an annual rate of nearly 18% through 2027 thanks to growing IoT adoption.
Similarly, Synaptics' automotive business is benefiting from production ramps by customers such as Toyota and Ford Motor Company. This niche should turn out to be another happy hunting ground for Synaptics, as the automotive IoT market is expected to grow at an impressive annual pace of 27% through 2029.
A no-brainer stock to buy
Synaptics' impressive growth and the sunny prospects of the IoT market make it a screaming buy, especially considering its valuation.
The chipmaker trades at just 21 times trailing earnings and 10 times forward earnings, which points toward a nice increase in the company's bottom line. What's more, these multiples represent a nice discount to the Nasdaq-100's price-to-earnings ratio of 27.
Finally, analysts expect Synaptics' earnings to increase at an annual rate of 15% for the next five years. But it wouldn't be surprising to see it grow at a faster pace thanks to the massive IoT opportunity it is sitting on. All this makes Synaptics an enticing tech stock to buy right now, as it could come out of its slump and soar higher in the long run.