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Morningstar | Mobile Takes Back Seat to Consumer IoT Solutions at CES 2019 for Synaptics; Shares Undervalued

We came away from Synaptics’ product demonstrations and investor presentations at CES 2019 with renewed confidence in our positive thesis on the firm. Beyond its mobile-centric portfolio, the company showcased a bevy of promising initiatives across consumer Internet of Things, automotive, and even PC. Financially, we believe the firm has done a nice job over the past six quarters driving gross margin expansion while maintaining stable operating expenses ($108 million on average) amid volatile revenue (chiefly due to its mobile exposure). We foresee stabilization in the mobile and PC businesses augmented by growth in consumer IoT. Our $64 fair value estimate is intact and we reiterate our view that investors with the patience to deal with the volatile nature of the semiconductor component space may find current price levels attractive, though we reiterate our no-moat and very high uncertainty ratings.

When we asked former Conexant president (and current Synaptics vice president) Saleel Awsare how the firm would build on its current far-field voice offerings found in countless Google Home and Amazon Alexa products, he highlighted the firm’s latest AudioSmart solutions, which target voice-enabled smart home devices such as hubs, speakers, and appliances. These system on chips were designed on a 22-nanometer process node (fairly advanced for consumer IoT) and feature neural network acceleration for superior speech recognition as well as the latest far-field voice processing to improve voice pickup in noisy conditions. We saw this work fairly smoothly on a smart speaker in a room with a loud movie, music, and numerous people speaking in the background.

Additionally, we saw Synaptics’ AudioSmart and VideoSmart utilized in IPTV/OTT systems such as the latest SK Broadband consumer devices to be launched in 2019. These feature similar far-field voice processors that allow consumers to better control their TVs with their voice while adding artificial intelligence capabilities to 4K HDR video. Notably, we saw examples where certain voices brought up user-specific suggestions (sports for one user, movies for another, and so on) as the AI interface learns about its users over time. One prototype was able to identify a certain motion (pitching in baseball) and call out each instance over a whole game. This technology could take highlights to another level, in our view, as it could easily be leveraged to identify every three-point shot by Steph Curry in an NBA game to enable users to watch them in quick succession.

We also saw interesting applications of Synaptics’ core touch, display, and fingerprint solutions in automotive scenarios such as infotainment systems and security measures. The firm will build on its display driver design wins with touch, TDDI/OLED, and finally fingerprint in steering wheel or start button solutions in upcoming years. Although automotive units pale in comparison with those in mobile, automotive average selling prices are twice those of mobile, while eight of the top nine automotive display manufacturers have adopted Synaptics' TDDI. Within PC, we were able to use high-end PCs with optical fingerprint sensors in the glass-based touch pad (which help save space and improve performance). Also, we saw enterprise systems with superior fingerprint sensors for single sign-on purposes to virtual private networks or servers, including a Microsoft-sponsored system that we expect will help drive fingerprint sensor penetration especially at the enterprise level. Overall, Synaptics expects an attach rate of 31% by 2021 from 12% in 2017 for fingerprint sensors in notebook PCs.