Synaptics, Incorporated (SYNA) is a Winning Pick, but Wait for the Pullback

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When Synaptics, Incorporated (NASDAQ:SYNA) bottomed in November late last year, the uptrend that followed was not entirely unexpected. Synaptics is a leader in the touch-screen space, and the company solidified its position with design wins in the market place. For 2013, this growth in display integration solutions is expected to continue. The ForcePad and ThinTouch are design wins that are scheduled to be made available later this year.

Synaptics, Incorporated (NASDAQ:SYNA)PC in the Doldrums: No Problem for Synaptics, Incorporated (NASDAQ:SYNA)

Synaptics shares were previously held back by the gloomy outlook for the PC market. Ultrabooks did not boost sales as hoped, while tablet demand simply continued to grow, which partly contributed to the weakness in the notebook market. For Synaptics this was bad news, yet laptop computers are not going away any time soon. Sure sales growth was negative, but the industry is an opportunity for specialist plays like Synaptics. Synaptics is expecting that its share of the ultrabook market in 2013 and 2014 will grow, thanks to the introduction to its ForcePad and ThinTouch technology.

Strong Mobile Segment

Synaptics benefited from strong growth in mobile phone and touchscreen applications. Last quarter (for the December quarter), revenue of $143 million was helped by this segment. Non-GAAP gross margins were 48.4%, and the company ended the quarter with non-GAAP earnings of $0.53 per diluted share.

Growth in China

Investors all but expect China to be an important market for the smartphone market. For Synaptics, this is no different: 60% of OEM smartphones were in China. Synaptics has a leadership position in this industry through domestic OEMs that include ZTE, Huawei, and Lenovo.

2013 Outlook

Synaptics thinks that it could grow its market share in ultrabooks this year. Last year, its TouchPad solutions were in 7 out of the 10 top ultrabooks (as ranked by PC Magazine).  The fact that it’s incorporation in Microsoft Corporation (NASDAQ:MSFT)’s Windows RT, Hewlett-Packard Company (NYSE:HPQ)’s Envy x2, and Dell Inc. (NASDAQ:DELL) systems illustrates just how ubiquitous TouchPad solutions is.

Much of the growth in the PC segment will depend on Microsoft and HP. Both companies need to better articulate the benefits of upgrading to a Windows 8-based touch device. Microsoft will be releasing the “Pro” version of the Surface tablet this year.  Although pricing may turn-off buyers, the “Pro” is more complete, and Windows-based software is supported.

HP recently updated the Envy mode, and the new Spectre XT TouchSmart showcases the strengths of Synaptics. Although the laptop could have a better battery life, the touch-interface was well-received by reviewers.

Synaptics currently has a backlog of around $79 million. When customer forecasts and product mixes are considered, Synaptics anticipates revenue will be between $140 million and $148 million in its next quarter ending in March. Gross margins will remain strong at around 47%-48%. The company expects earnings to be $0.50 to $0.58 per diluted share (non-GAAP).

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