Name That Trade – $SYNA: Touched By an Apple

by Enis September 3, 2014 11:00 am • Commentary

The AAPL ecosystem is truly breath-taking.  Apple’s global supply chain is as large as some countries’ total economies, with a huge array of workers ranging the entire spectrum from the least skilled to some of the most skilled in the world.

As a result of its enormous size, AAPL’s designs and decisions can change the direction of entire industries.  We got involved with one such stock, GTAT, on Friday (detailed in this post).  Synaptics is another relatively unknown stock that caught our eye.  The company has long been a leader in touchscreen technology, but the smartphone market’s growth has been a particular boon for SYNA as a business and as a stock…   

Here is the incredible growth in the mobile application revenues for SYNA in just the past year:

Screen Shot 2014-09-03 at 8.24.00 AM

The company grew mobile revenues around 75% year-over-year in the first nine months of the most recent fiscal year, while PC revenues have been essentially flat.  While Synaptics was one of the first companies to get into touch pads on both notebooks and touch screens for desktops, the real exciting new business for the company is a result of its acquisition of Validity Sensors last year.  Barron’s had some positive commentary on the implications of that purchase in this weekend’s issue, summarized here by Reuters:

Synaptics became a significant player in the fingerprint identification business in November when it bought Validity Sensors Inc. Orders for Synaptics’ touchscreens that incorporate the technology have surpassed expectations, Barron’s said.

Fingerprint revenue now makes up 22 percent of Synaptics’ sales, the report said, adding that the cost of the fingerprint sensors range from $2 to $4 per unit.

Business will be greatly helped, Barron’s said, by an unexpected commission from Samsung Electronics to make the fingerprint sensor for its new Galaxy S5 smartphone.

The fingerprint identification technology is particularly relevant at a time when data concerns are becoming even more important for business, consumers, and software companies.  And what about the shift to mobile payments?  I would imagine that fingerprint ID’s could be an integral part of a secure payment system.

The incredible thing about SYNA as a stock is that even though it is up 65% year-to-date, the valuation is still quite reasonable, at 25x P/E, with analysts projecting sales and EPS growth of an average of 10-15% over the next 3 years.  Granted, the stock has more than tripled since the start of 2013, but investors are still much less enthusiastic about SYNA’s prospects relative to the vast majority of growth stocks in this market, at least on a valuation basis.  Here is the lifetime history of the stock’s trailing 12 month P/E:

[caption id="attachment_44981" align="aligncenter" width="600"]Trailing 12 month P/E in SYNA, courtesy of Bloomberg Trailing 12 month P/E in SYNA, courtesy of Bloomberg[/caption]

The stock’s reasonable multiple, while not historically cheap, is still surprising given the incredible move in SYNA in the past 2 years:

[caption id="attachment_44984" align="aligncenter" width="600"]SYNA monthly chart, courtesy of Bloomberg SYNA monthly chart, courtesy of Bloomberg[/caption]

However, I would argue that the company’s growth prospects are much brighter today than they were 2 years ago, when the product portfolio was more limited and the mobile opportunity was not nearly the size that it is today.

Options are at the low end of the 2 year range after the stock’s bounce on earnings in early August:

[caption id="attachment_44985" align="aligncenter" width="600"]30 day implied volatility in SYNA, courtesy of Bloomberg 30 day implied volatility in SYNA, courtesy of Bloomberg[/caption]

Given the big run and the possibility that momentum traders are heavy in the stock, I would probably look to use options for long exposure in SYNA rather than simply buying the stock.  However, options are relatively illiquid in SYNA, so I am going to be careful if I do end up putting out a limit order for a call or call spread position.

Aside from the fingerprint technology or the company’s traditional business, the diversity of Synaptics’ mobile offerings is quite impressive (see this summary page from the company’s site).  Multiple potential revenue streams are available as mobile growth continues, and the valuation remains attractive.  I don’t plan any new trade at the moment, but want to keep this one on the radar in case it pulls back even more in the near term.