For most of its 35-year history, Synaptics had been a low-margin chips and component producer for cellphones and PCs. That changed in 2019 when the board brought in a new management team led by current CEO Michael Hurlston. He went immediately to work to transform Synaptics into a high-margin Internet of Things (IoT) components producer.
In December, Synaptics completed its third major acquisition in as many years after it paid $440 million for chip maker DSP Group. DSP brings chip technology used to connect the physical world of sound and images with the digital realm. DSP has been accretive to earnings from the get-go.
Other notable acquisitions included the $444 million paid for DisplayLink, a company that dominates the market for parts used in PC docking stations. The $250 million paid for Broadcom’s (AVGO) wireless IoT business brings Wi-Fi, Bluetooth, and GPS technologies into the fold.
For Synaptics, the Internet of Things now accounts for more than 70% of revenue, up from 30% only three years ago. Enabled by recent acquisitions, Synaptics now makes parts for virtual-reality headsets, security cameras, automotive displays, voice-recognition systems, and a range of other applications.
The shares trade at only 8.8 times the reduced 2023 EPS estimates. The average for the past five years has been 12.8 times. The low P/E multiple is too enticing to ignore for such a profitable, margin-expanding, proven growth company. Investors are pricing Synaptics as if growth is gone forever. It’s not.
Growth will return, and when it returns, I expect more investors will be enticed by the value proposition. I like Synaptics’ business models. I like the growth opportunities that now reside within its wheelhouse. My price target is $135 — a 45% premium to the market price today.