Apple (AAPL -2.54%) announced the new iPad Air and iPad Mini last week. Among other hardware improvements, Apple added its Touch ID fingerprint sensor to both models. With about 68 million iPad units sold in the past year, the addition of a fingerprint sensor to Apple's tablets instantly increases the market for fingerprint sensors.
Unfortunately for investors, Apple produces its fingerprint sensor chips in house, after acquiring AuthenTec in 2012. But several other smartphone and tablet makers want in on the biometric trend including Samsung (NASDAQOTH: SSNLF) and HTC, which both released smartphones with fingerprint sensors in them this year. Research group IHS expects that trend to continue, and it sees the fingerprint sensor market quadrupling to nearly $1.7 billion by 2020.
There's one company investors can buy now to capitalize on the upcoming growth in fingerprint sensors: Synaptics (SYNA -1.83%).
The other fingerprint sensors
Synaptics is the company behind the fingerprint sensors in Samsung devices like the Galaxy S5 and the Galaxy Tab S tablets. The company acquired Validity Sensors last year, and it believes its fingerprint sensor business is synergistic with the company's core capacitive touch sensor technology, which is used in touchscreens and notebook computer trackpads.
Going forward, Synaptics CEO Richard Bergman expects the majority of the company's growth to come from fingerprint sensors. The company is even more optimistic than IHS on the potential growth for fingerprint sensors. Bergman stated in January that he sees the market going from 30 million units in 2013 to 500 million units in just two years.
Currently, Synaptics only produces the swipe sensors you'll find in Samsung's flagship smartphones and tablets. It plans to release the area sensors similar to Apple's Touch ID by the end of the year, which will be marketed toward more high-end phone OEMs. The problem with area sensors, however, is that they require more space in the bezel than a swipe sensor. Android OEMs have been making the bezels smaller and smaller and removing any physical buttons.
Synaptics has a solution, however. It plans to integrate its fingerprint sensor with the touchscreen. That technology is still a couple of years away, but Synaptics has an advantage over Apple to make that vision a reality.
Synaptics' sensor is not embedded on a chip like Apple's. That allows Synaptics to make a bigger sensor without building a bigger chip. It also means it can use clear electrodes to design the sensor circuit making it invisible under the glass display. That's not possible with Apple's current design, but Apple filed a patent last year for a fingerprint sensor that is transparent.
Riding Apple's coattails
Of course, Synaptics isn't exactly competing against Apple, so whether its technology is better or worse is somewhat of a moot point. Apple isn't likely to license its Touch ID technology, so Android manufacturers are banking on Synaptics to provide similar capabilities, which it's fully capable of delivering.
Apple has the power to create a market, though, and that's exactly what it did with Touch ID in the iPhone 5s. Samsung and HTC were quick to jump on board with fingerprint sensors in their smartphones. The expansion of the technology in the newest iPads makes it more likely other tablet makers will want fingerprint sensors in their devices and Synaptics is one of the first companies to get a call.
This summer, Synaptics purchased Renesas SP, which makes display driver chips. Apple requires its touch panel suppliers to use Renesas SP chips, which have an average sales price between $1 and $2. So even though Apple moved its touch and fingerprint technology internally, Synaptics is still making a nice chunk of change from Apple's successful touchscreen products.
Is now the time to buy?
Synaptics stock is trading for a whopping 58.3 times trailing earnings. But that doesn't give you the full picture. The past 12 months only include about eight months of Validity's fingerprint sensor business, and don't include any of the Renesas SP acquisition, which just closed at the end of September. That's why analysts expect Synaptics earnings to grow 49% in fiscal 2015 (ending in June 2015).
On a forward earnings basis, Synaptics trades for just 11.6 times 2015 earnings. That's a very reasonable valuation considering the expected 49% earnings growth this year and the additional 10% growth analysts expect in fiscal 2016. Over the next five years, analysts expect earnings growth to average 20% per year, resulting in a PEG ratio of 0.58, which indicates very good value.
If Bergman is right about the growth of fingerprint sensors over the next couple of years, that growth could be much faster. Last quarter, Synaptics fingerprint ID business grew revenue 126%. That rate is unsustainable, but it's a good indicator of the momentum behind fingerprint sensors, and Synaptics is at the forefront.