The Rise and Fall of Synaptics

Synaptics (NASDAQ:SYNA) -- which makes touchpads used in laptops and digital music players -- last week reported quarterly earnings of $0.18 per share, well below the $0.33 in the same quarter last year. The sales numbers were equally dismal, coming in at $48.6 million, 14% lower than last year's $56.5 million. In the conference call, Synaptics' chief financial officer predicted that the next quarter's sales figures would be $42 million to $45 million. As a result, investors were heading toward the exit signs. The stock price fell nearly 20% by the close of trading Friday. Ouch!

For shareholders, this should not have been a huge surprise. Synaptics has been giving lower guidance since early last year, after news hit the Street that Apple Computer (NASDAQ:AAPL) would no longer use the company's click-wheel feature in the next series of iPods. Apple also switched from using Synaptics touchpads for its PowerBooks to those made by Cypress Semiconductor (NYSE:CY). After losing half its value in the last year, Synaptics' stock gained favor again and increased nearly 55% over three months.

A simple fact remains. The relative growth (compared with its other businesses) iPods and the associated touch-wheel business might well have provided is gone. And the growth outlook doesn't contain anything I'd perceive to be an immediate or longer-term catalyst. Then consider the 178% increase in net income in the few quarters past, and the fact that I see the rate of sales growth for its touchpad technology and click-wheels for MP3 players failing to keep pace with past figures -- a factor that was ostensibly built into the company's valuation.

The bottom line: Those who bought Synaptics stock thinking it would return to the highs of 2005 might be in for a disappointment. Last year, the company appeared poised for solid growth and, accordingly, looked to be an undervalued tech stock. But the financial landscape has changed. At current prices, the stock sports a trailing P/E of 21, not at all too cheap considering the earnings growth forecast is for the low single digits. Foolish investors would be wise to wait before buying until Synaptics delivers.

Other Foolish insights worth scrolling to:

• Synaptics' Ups and Downs
• Don't Ride Wall Street's Seesaw
• Will Synaptics Keep Rolling?

Fool contributor Kelvin Taylor does not own shares of any of the companies mentioned.