Synaptics (NASDAQ: SYNA) may not be a household name, but the components it makes are likely in products that you use in your household on a daily basis. From Apple‘s (NASDAQ: AAPL) iPhones to laptops to smart home appliances, Synaptics’ tech is used in a broad range of applications.
This is part of why Synaptics looked like a top growth pick at the beginning of 2021, and so far the human interface solutions provider has not disappointed. Its gains in 2021 have handsomely outpaced those of the broader market.
The good news is that investors still have an opportunity to jump on to this gravy train. The tech company has more growth ahead, and more importantly, it is trading at reasonable valuation multiples despite its rally.
The PC business has gained momentum
Synaptics gets its revenue from three segments — personal computers (PC), mobile devices, and the Internet of Things (IoT).
In its fiscal 2021 second quarter, which ended Dec. 26, 2020, the PC business supplied 26% of the company’s revenue as strong end-market demand lifted the segment to record-breaking results. Synaptics had forecast that the PC business’s contribution would jump to 30% in the recently concluded fiscal Q3. CEO Michael Hurlston said he believes it will continue to enjoy strong momentum throughout 2021.
Hurlston said that the demand for gear to support remote work and online learning has remained strong after last year’s initial coronavirus-driven spike. He believes that the higher run rate of the PC business is now more sustainable as people are buying notebooks to enhance productivity. Market research firm Canalys estimates that sales of notebooks could increase by 9.4% in 2021 and 3.1% in 2022.
What’s more, the notebook market is expected to clock 4% annual growth through 2025. Similarly, sales of desktop PCs are expected to increase at a compound annual growth rate of 4% through 2025. As such, demand for Synaptics’ touchpads, biometric solutions, display interfaces, and other related PC solutions should remain strong, especially considering the company’s dominant position.
Synaptics reportedly holds more than 80% share of the fingerprint sensor market and claims to be the No. 1 provider of touchpads used in notebook PCs. The biometric fingerprint sensor market is expected to hit $9.4 billion in value by 2027 as compared to just $2.9 billion in 2019, according to Allied Market Research. All of this is good news for Synaptics shareholders. The company is on track to make the most of this opportunity as it is supplying its fingerprint sensors to leading PC makers such as Lenovo.
Mobile and IoT are in great shape
The mobile business will be the next crucial growth driver for Synaptics — the segment supplies a third of its total revenue. This business is in fine form thanks to Synaptics’ supplier relationship with Apple, whose latest iPhones have been extremely hot sellers. Synaptics’ said its largest mobile segment customer accounted for 21% of its total revenue in its fiscal Q2. That customer is most likely Apple — Synaptics’ mobile revenue has shot up nicely since the iPhone 12 series went into production.
Synaptics has already indicated that the new iPhones are using its OLED touch controllers. Apple has reportedly been raising its production forecasts for the iPhone 12, and its next iteration is expected to be an even bigger sales success as the 5G smartphone upgrade cycle continues. Given that, this partnership could drive significant growth for the component maker over the next couple of years.
And finally, Synaptics expects its IoT business to grow at a faster pace than the broader market and become its biggest source of revenue. The IoT business is projected to produce 41% of Synaptics’ revenue this fiscal year, up from 24% in fiscal 2020. The company expects the IoT segment to reach 55% of total revenue in the long run.
That won’t be surprising as Synaptics is making notable progress in IoT niches such as the automotive market, where more than 13 OEMs (original equipment manufacturers) are expected to use its chips. The company also anticipates that the demand for smart-home products could double within the next year. Thanks to these catalysts and the design wins it already has in the bag, Synaptics forecasts that it can grow at a faster pace than the overall IoT market’s anticipated CAGR of 10% to 15% in the coming years.
Synaptics is still a great buy
Synaptics trades at just 17 times forward earnings and 35 times trailing earnings, indicating that analysts expect a serious jump on the bottom line. This is evident from the chart below.
That earnings growth seems achievable. Synaptics estimates that its non-GAAP operating margin could jump to 30% in the long run as compared to the fiscal 2021 estimate of 23%. The figure stood at 17% in fiscal 2020, but the shift to higher-margin businesses has helped the company make rapid progress on this front. So, Synaptics looks well-placed to deliver long-term earnings growth and that could lead to more upside, which makes it a growth stock worth buying given its reasonable valuation multiples.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Synaptics and recommends the following options: long March 2023 $120.0 calls on Apple and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.