Stock investment – Will These Deals Boost Synaptics’ Growth? — The Motley Fool

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Shares of Synaptics (NASDAQ:SYNA) have had a rocky ride on the stock market this year — rising just 8% so far — as the company has been under scrutiny regarding whether or not is has secured a spot in Apple‘s next iPhone. Supply chain rumors indicate that Apple has declined to use Synaptics’ solution for its upcoming device, though it seems to be the only viable choice on the market that integrates a fingerprint sensor within the touchscreen.

Now, it isn’t clear whether Synaptics will supply its touch and display integration (TDDI) chips for the next iPhone, so it doesn’t make much sense to speculate on this point right now. However, the interface solutions provider’s revenue has started gaining traction in recent quarters thanks to the growing adoption of edge-to-edge smartphone displays.

TDDI chip demand is expected to shoot through the roof in the coming years, hitting 654 million units in 2022 as compared to just 100 million units in 2017, according to IHS Markit. Synaptics, therefore, has a huge end-market opportunity here, but the company has decided to diversify into more areas. Its latest acquisitions could substantially boost its revenue in the long run.

Synaptics buys its way into big markets…

Earlier in June, Synaptics made a double acquisition, spending $343 million in cash and stock to acquire voice and audio solutions company Conexant Systems, and doling out another $95 million for the multimedia business of Marvell Technology (NASDAQ:MRVL). Synaptics’ management believes that these acquisitions will immediately start boosting its gross margin, but the long-term gains could be more significant.

Image source: Conexant. 


In fact, Synaptics forecasts that its total addressable market will go up by 38%, or $2.8 billion, growing to a total of $10.3 billion by 2020. This could substantially increase the chipmaker’s top line, in the long run, considering that it generated $1.6 billion in revenue over the past year.

Synaptics management is right to be optimistic about these acquisitions, as they will push the company into the Internet of Things revolution, especially the smart home segment. For instance, Conexant develops voice and audio solutions for Amazon.com‘s Alexa devices. It recently revealed an audio development kit that can be used by manufacturers to integrate the Alexa voice service into their products.

Now, this could be a big deal for Synaptics, as the Alexa voice assistant is expected to become a $10 billion business (including hardware sales) going forward, according to RBC Capital Markets, driven by the increasing adoption of the Echo speaker. More specifically, sales of voice-controlled speakers — such as the Amazon Echo — could hit $2.1 billion by 2020, Gartner estimates, indicating that Synaptics has bought its way into a rapidly growing market.

On the other hand, Marvell’s multimedia business will help Synaptics tap a variety of markets apart from smart speakers. Marvell’s multimedia products are used in set-top boxes and internet-enabled multimedia streaming devices. This should open up another lucrative opportunity for Synaptics as set-top box shipments could jump to almost 324 million units in 2021, compared to 272 million units last year.

…but will run into stiff competition

There’s no doubt that Synaptics could make big money with its latest acquisitions, but this is easier said than done because it’s going to run into chip behemoth Qualcomm (NASDAQ:QCOM). The latter is aggressively targeting the smart speaker market and recently rolled out a new product design that could pose a big challenge for Synaptics.

The chipmaker’s mesh networking router can eliminate the need for separate smart-home speakers such as the Echo by integrating the voice-control functionality right into the router. In fact, Qualcomm’s platform gives router makers the option to integrate its own six-microphone array and also supports a number of trigger words, allowing users to speak straight to the router.

Qualcomm’s technology has the potential to disrupt the virtual-assistant device market and derail Synaptics’ ambitions if router-makers start using the Qualcomm’s reference design to roll out routers that double as smart speakers.

The Foolish bottom line

There’s no doubt that Synaptics has made smart acquisitions that push it in the middle of fast-growing markets, but their success isn’t yet guaranteed given Qualcomm’s presence in the space. Investors, therefore, should closely watch if Synaptics’ new acquisitions actually reap results or if the competition kills its prospects.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMZN, AAPL, Gartner, and Qualcomm. The Motley Fool has a disclosure policy.

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