Synaptics Inc. (NASDAQ: SYNA), a human interface company, continues its upward tick as the stock registered a 4% gain to close above $60 on Wednesday.
Valuation stayed poised around a forward price-earnings (P/E) of 11 based on 2018 earnings. Synaptics is growing at a reasonable rate; earnings growth of 18% p.a. is expected during the next five years. Given the strong earnings growth history, touch display driver integrated (TDDI) products and in-display fingerprint growth, the stock can move past $70 going forward. You can read the detailed initiation analysis here. Following are some of the highlights from Stifel 2017 Technology, Internet & Media Conference.
Rick Bergman, Synaptics’ CEO, highlighted the growth avenues of the company along with addressing some questions regarding transition to OLED and gross margin.
The company was focused on human interface, known for touch pads, in the early days. Then it shifted to mobile markets. Now the company is focused on fingerprint sensors and TDDI, noted the CEO. TDDI, optical fingerprint, especially in-screen solutions, OLED display drivers and automotive market are the primary growth avenues, according to the CEO.
TDDI opportunity
Speaking of TDDI, Bergman mentioned that the company shipped over 40 million units during the last quarter. The company started to work on TDDI in 2009. As the manufacturers are moving toward TDDI now, the company witnessed more than 40% sequential growth in TDDI shipments during the last two quarters. When asked about TDDI adoption, the CEO mentioned 400 million unit shipments for the year, or 40% of the total shipments. Total product unit shipments including TDDI are expected to be consistent around 1 billion during the next few years. In TDDI, Synaptics is expecting a penetration rate of more than 70% as manufacturers are embracing TDDI. In the past, margin seemed to be a problem on the TDDI side, but the CEO explained that the company was focused on “getting the products out.”
Now, Synaptics is focusing on cost cutting for the chip and the system, which is expected to boost the gross margin.
OLED opportunity
Regarding OLED, it’s thriving especially for panels shipping to Chinese original equipment manufacturers (OEM). OLED is witnessing healthy adoption in flagships; product mix is expected to shift toward high end during the next 12 to 18 months.
Note that a shift toward high end will also provide a margin boost for the company.
Synaptics sent samples of a couple of OLED parts to the manufacturers and is expecting mass production by 2018.
“We have the best technology in the industry and see a very good value proposition in OLED,” said Bergman at the conference. It is worth mentioning that OLED screens can add value for end users in terms of screen real estate and screen flexibility.
Fingerprint opportunity
The company is not at the top in finger prints but it’s in the top three. Synaptics face competition from some Asian companies and Fingerprint Cards (FRA:FPQ1), on this front. The industry is transitioning from capacitive to optical fingerprint sensors, and Synaptics seems ready for the transition. According to the CEO:
“At Synaptics, we have been pretty good at anticipating changes, so they are well positioned in optical transition.”
The company started to distribute samples of its in-screen fingerprint solutions and expects mass production by year end. In the optical, in-screen arena, Synaptics faces competition from only one company, but the management claims to have a lead over the competition as far as the technology is concerned. Optical solutions also garner premium over capacitive solutions. It works with OLED, which is usually priced 3x compared to conventional LCDs. Optical solutions can certainly bring a margin boost for the company going forward.
Automotive market?
In automotive, Synaptics made substantial investment over the past few years. According to the CEO, it’s not a huge business but a decent margin business. Further, automotive was originally expected to be a display business given the increasing screens per cars, but the company is also noticing healthy demand in the fingerprint space in the automotive market.
Other highlights from the conference talk
Market is shrinking for discrete touch solutions; discrete display market is also declining as TDDI is gaining traction. However, mainstream and low end will remain discrete.
Oxy partnership is geared to be in the bezel area, not in the active area.
Last year, the company shipped substantial volume to Huawei, which is the third-largest smartphone manufacturer. Success of the Honor series will be reflected in Synaptics’ results going forward.
Consumer IoT will be another high volume market the company is expected to focus on in coming years.
Bottom line
Synaptics is a TDDI leader, which is also exposed to the growth of fingerprint sensors. The company has a virtual monopoly in the in-screen fingerprint market given its technology lead, only one other competitor. The company is also getting business from the growing automotive market. Further, there’s evidence of gross margin improvement due to changing product mix, OLED and in-screen fingerprint adoption. Cost focus, as mentioned by the CEO, will also boost the margin. Trading at 11x 2018 earnings, with an expected margin boost, Synaptics is worth its while. Investors should hold on to Synaptics.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
