EUR 850.00 For Business Accounts Only

Morningstar | Near-Term Mobile and Internet of Things Markets Create Headwind for Synaptics; Lowering FVE to $55

Synaptics reported fiscal second-quarter sales and earnings largely in line with our forecast and management guidance. However, guidance for the upcoming quarter was slightly below our prior expectations, with revenue expected to decline by more than 8% year over year at the midpoint of guidance. After reviewing our long-term forecasts for the firm, we are lowering our fair value estimate to $55 from $64. Despite our downward revision, shares traded sideways afterhours and we continue to view Synaptics as heavily discounted. We would remind investors that we give Synaptics a very high uncertainty rating and believe it lacks any discernable competitive advantages that warrant moat. However, investors with the patience and a willingness to deal with the volatility associated with investing in a component supplier may find an attractive opportunity at current prices.

Sales in the second quarter grew by 2% sequentially, declining 1% on a year-over-year basis, to $425.5 million which was right in the middle of prior guidance. Adjusted gross margins were higher than our forecast, if still within guidance, expanding by 90 basis points sequentially due to the favorable mix across each end market. Consumer Internet of Things sales declined however by 18% year over year, with further declines expected in the upcoming quarter, due to the softer economic environment diminishing the near-term investment in the space. We believe this is a near-term issue and, in our view, is not of material concern to our long-term outlook. That said, signs of sustained weakness in Internet of Things revenue or slowing design wins, whether due to increased competition or an unfavorable macro environment, would certainly have an impact on our thesis. For now, however, management discussed significant design activity in various verticals that sustain our thesis including in automotive display, smart speaker, set-top boxes and even VR with the firm’s DDIC being selected for a Qualcomm design.

PC-related sales remained steady growing nearly 4% year over year amid sustained demand for touch and fingerprint products. Mobile sales in the quarter grew by 5%, both year over year and sequentially, while management highlighted the increasing number of OLED DDIC engagements as well as TDDI growth. Currently, Synaptics’ TDDI products are being used within seven separate Huawei smartphones in addition to other Oppo and Vivo products. We believe the diversity of opportunities for different technologies at different price points in the mobile market should help the firm further curb its dependency on a few large customers for mobile-related revenue.