Synaptics Can Give a Serious Boost to Your Portfolio

Synaptics (SYNA, Financial) is a technology company involved in integrated touch, display and fingerprint solutions. Primary products include touch screen controller ICs, display driver ICs and fingerprint sensors.

In 2013, the company bought its way into fingerprint ID sensors through the acquisition of Validity Inc., and it also acquired a display driver IC player, Renesas SP drivers. Competitors include Fingerprint Cards (FRA:FPQ1, Financial)(OSTO:FING B), FocalTech (TPE:5280, Financial), Atmel (ATML, Financial), Cypress (CY, Financial) and STMicroelectronics (STM, Financial). Synaptics was founded in 1986 and is headquartered in San Jose, California.

Revenue insights

The company generates most of its revenue from discrete display; discrete touch and PC touch IC products. However, Synaptics’ revenue base is shifting toward integrated touch, or TDDI, and fingerprint solutions. Net revenue from the company’s human interface product solutions for mobile product applications accounted for approximately 88% during 2016; Samsung contributed 21% toward the company's revenue during 2016.

Source: Investors’ presentation

Industry prospects

According to Synaptics, the serviceable addressable market (SAM) is expected to grow to $7.5 billion by 2020, which translates to a CAGR of 7.10%. Touch and display driver integration (TDDI) market share is projected to more than double to reach 14% of the SAM. The biometric attach rate will grow at a CAGR of 35% during 2016-2020.

The fingerprint market is expected to grow at a CAGR of 31% during 2016-2020 to reach 1.4 billion units by 2020. MarketsandMarkets forecasts that fingerprint sensor market is expected to grow at CAGR of 18.9% between 2016 and 2022. The growth will primarily be fueled by increasing penetration of mobile phone sensors and the adoption of mobile commerce.

To review, the TDDI and fingerprint market is set to grow in coming years amid an increase in adoption rate of fingerprint sensors in smartphones. TDDI is compelling in cost savings and design efficiency. Synaptics already holds a lead in TDDI market share and also has a diverse IP portfolio for fingerprint sensors, details below.

Thesis

Synaptics will benefit from the fingerprint sensor opportunity

Synaptics’ partnership with OXi strengthens the company’s position in the under glass fingerprint sensor market and, geographically, in China. Under glass sensor capability will result in high-end design wins going forward. Further, mobile payments are expected to enhance fingerprint sensing adoption. Revenue contribution from China is expected to reach 35% in 2017 as compared to 19% in 2015. It is worth mentioning that shipments of smartphones with fingerprint sensor are projected to cross 1 billion units by 2018, a CAGR of 45%.

Synaptics is a market leader in touch and display driver integration

Synaptics has a monopolylike market share in TDDI. Note that TDDI is expected to grow at a staggering 70% during 2016-2020. All major Android phone brands including Samsung (XKRX:005930), Huawei (SZSE:002502), LG (XKRX:003550) and MI are Synaptics customers in the TDDI market. Synaptics' market share for TDDI stands at around 70%, according to the company’s investor presentation. Note that Synaptics is also a leader across all its market segments.

Constant increase in core intellectual property is a key competitive advantage for Synaptics

On the fingerprint sensor front, Fingerprint Cards holds around 65 patents as compared to more than 500 for Synaptics and Validity. However, Fingerprint Cards does hold some of the key patents. Patents across all technology areas of Synaptics grew from around 600 in 2011 to 1,900 by the third quarter of 2016, translating into a CAGR of 27%.

Source: lens.org

Recent selloff is fear induced; valuation paints a positive picture for Synaptics

Shares of Synaptics fell on reports of weak demand and inventory buildup from Fingerprint Cards. Cowen defended Synaptics by arguing that Synaptics isn’t exposed materially to fingerprints and China. Synaptics expects to generate 20% of its revenue during 2017 from the fingerprint market, and its China revenue is also expected to grow. Fingerprint Cards withdrew guidance citing seasonality, which can also easily be a case of stiff competition. Synaptics didn’t comment on revision of its guidance, which is indicative that Synaptics is on track with its guidance.

PEG multiple valuation

Despite seasonality and feared market share loss, valuation based on price-earnings (P/E) and EVA reveals an upside for Synaptics.

Focus Equity Estimates

The table above used a PEG multiple to arrive at the valuation of Synaptics. A weighted average of PEG for the counterparts is used for valuation. The valuation sheet depicts that even if Synaptics matches the lowest analyst forecast for 2018, it’s still worth $59 a piece indicating asymmetry of return going forward. Synaptics will manage to achieve the consensus given its TDDI and fingerprint opportunity.

EVA-based Monte Carlo valuation

A Monte Carlo simulation based on Synaptics' consensus earnings and a cautious residual growth also indicates severe undervaluation for the stock. See the data that follows:

Focus Equity Estimates, Prudena Platform

The simulation indicates that the price is almost normally distributed around $76 with a very low chance of the stock trading around $50. This indicates that if consensus estimates hold, there’s a considerable upside for Synaptics.

Verdict

Synaptics is a strong buy and a classic example of a mispriced stock that can unlock value. The stock will trend upward going forward amid strong TDDI and fingerprint presence coupled with the fact that it’s fundamentally mispriced; more than 30% upside is in the cards for this stock during the next few months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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