Back in December, Synaptics (SYNA) was suffering; news that Apple (AAPL) was pivoting away from third-party touch screens in next-generation iPhones had sent the stock down 45% in a matter of months, recalls Todd Shaver, growth stock expert and editor of BullMarket.com.
People focused on the headlines and fretted over whether the overall business would ever recover from losing a core customer, but we knew the long-term deck was still stacked in Synaptics’ favor.
For one thing, global phone sales had already hit a wall in terms of category growth. That’s why Synaptics has been making a pivot of its own into automotive and voice-activated speaker applications while upscaling its existing screens to get them incorporated into as many mobile devices as it can. It’s working.
While headline mobile device revenue is down 34% year over year, money flowing from the other applications has soared 320% to help fill the gap. Granted, the base is still small, but that growth rate restores $70 million a quarter to what was once a phone-dominated business in decline.
Add a little upside from a new generation of touch-enabled personal computers with Synaptics screens, and non-phone applications are accelerating fast enough to eliminate the phone drag by the third quarter of this year.
Even in the current quarter, that net drag on growth only adds up to $3 million out of a $1.7 billion annual run rate, so the overall impact of soft phone sales is already within the margin of accounting error. It’s a tiny 0.4% glitch in the long-term business cycle.
And that’s exactly the logic that brought us to the stock in the first place. Here we are now and the trailing comparisons have played out as we suspected. But advancing the calendar six months has taken Synaptics a long way toward daylight.
Back in December, our forward revenue outlook was for barely $1.70 billion, or 3% negative growth. Now enough of the transition is behind us that the outlook points up: $1.75 billion ahead in 2018, versus $1.66 billion in the trailing year. Between revenue and growth, that’s almost the same math that took Synaptics to $65 last summer — only here at $42, the ante is a lot lower.
Synaptics isn’t sacrificing on the bottom line to turn its sales curve around either. Last summer, the growth outlook left the stock at a relaxed 12.5X earnings expectations. Now we’re anticipating an extra $0.39 per share ahead, which pushes the multiple all the way down to 7.5X earnings.
Synaptics is trading at about 1x sales, a very low valuation. That’s deep value. The story remains as tempting in the long term as ever. If anything, we’re within months of seeing our thesis validated now, so unless the selling gets completely out of control we’ll be here for the victory lap.
