Synaptics Stock: Is the Pivot Into IoT Good for Investors?
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Normally, one of the last words a retail investor wants to hear from a CEO of a company he is invested in – other than maybe “bankruptcy” or “federal investigation” – is “pivot.” At best, it denotes a repositioning, as a firm responds to market forces in order to compete and remain relevant. Ideally, management has done its due diligence and changed course in time. At worst, a pivot reflects a last-ditch, desperate attempt to dump a bad business model before the ship fully sinks.
We’ve certainly seen plenty of examples of the latter. Remember Amyris, a synthetic biology company that pivoted into health and beauty product ingredients? It filed for bankruptcy last year. Another synbio outfit, Intrexon, pivoted from developing genetically modified apples that don’t brown to selling bags of sliced apples. Now called Precigen (PGEN), Intrexon has reinvented itself once again into a biopharmaceutical company developing cell and gene therapies, with a market cap of about $340 million. Winning.
A theoretical example of the former type of pivot is Synaptics (SYNA), a nearly 40-year-old company that originally made its bones by developing touchpads for PCs and later moved into the mobile market with touchscreen technology. Now the self-described “pioneer and leader of the human-interface revolution” is pivoting hard into being an IoT hardware and software company. Yet revenues are way down over the last few quarters after hitting a record high in 2022.
Is this just short-term pivot pain or a long-term problem?
About Synaptics Stock
Founded in 1986, Synaptics developed the world’s first touchpad for laptops based on research by the company’s founders using neural networks and pattern recognition techniques with transistors on chips. Most of the major PC companies of the 1990s, as well as Apple, eventually adapted the touchpad tech. Remember the iconic scrolling clicky wheel on the iPods? That was Synaptics, too. It also claims that its tech powered the world’s first mobile phone with a touchscreen.
Between 2013 and 2014, Synaptics made a couple of key acquisitions to further drive its growth, particularly in mobile. It gobbled up a Silicon Valley company called Validity Sensors, which developed fingerprint sensor tech, in 2013 for $255 million. The next year it shelled out $475 million for the remaining outstanding shares in a unit of Japanese chipmaker Renesas Electronics Corp. That brought onboard a business with annual revenue of about $650 million and cash flow of about $100 million, as the sole supplier of touch/display driver integration (TDDI) chips for the iPhone.
By 2015, Synaptics revenue surged 80% to $1.7 billion, leading then-CEO Rick Bergman to declare that his company would march toward $2 billion on the back of its fingerprint sensor and TDDI technologies for mobile interfaces. Yeah, there’s a reason he’s the former CEO.
The IoT Pivot
Synaptics never hit its goal of $2 billion. Instead, revenues plateaued for the next few years until 2019 when they dropped to just below $1.5 billion. That year the company brought aboard a guy named Michael Hurlston, who has made it his mission to turn Synoptics into an IoT company. He inherited a couple of IoT puzzle pieces when Synaptics acquired two companies back in 2017. It paid $300 million for Conexant, which developed audio and voice hardware and tech for applications such as enabling AI assistants. For another $95 million, Synaptics acquired Marvell Technologies’ multimedia unit, which developed advanced processing technology for video and audio applications, along with smart home applications.
But the IoT pivot accelerated in 2019 after the company divested its mobile LCD TDDI business for $120 million. It then went on a bigger buying spree. In 2020, Synaptics paid $305 million for DisplayLink, which develops universal docking solutions and video compression technology that was to be integrated into Synaptics’ own video interface products and new wireless products. No doubt some of those new wireless products came via a $250 million deal that same year to acquire Broadcom’s wireless IoT business unit. The following year, Synaptics bought DSP Group for $538 million in cash, to add audio and smart voice capabilities to enhance the company’s tech in edge AI hardware. Synaptics spent another $15.8 million in 2022 to buy an Israeli firm, Emza, for its IoT visual sensors tech.
More recently, in 2023, Synaptics handed over another $130 million in cash to acquire or license more Broadcom tech. All in, the company has spent about $1.4 billion in IoT acquisitions in the last five years or so, not to mention another $1.7 billion in R&D.
The Boom-and-Bust Pivot Cycle
By 2022, after a couple of more years of flagging revenues, it appeared the pivot paid off when Synaptics announced record revenues of $1.74 billion in 2022. The company boasted that IoT accounted for 63% of revenues after IoT product applications surged 80% that year. The good times didn’t last long. After a strong Q1-2023, Synaptics saw a return of the boom-and-bust pivot cycle that began in the mid-2010s when its mobile business peaked. Revenue was down 22% from 2022 to 2023.
Management claims the drop in revenue is the result of too much supply (i.e., inventory) and too little demand, but says there’s light from the bottom of the trough. (Sounds like Mobileye.) Before we dive further into that, let’s unpack the IoT business a bit more, because it’s a complex and somewhat convoluted picture. We don’t need to be IoT experts but, we do need to understand enough of the business to gauge its long-term viability.
The Synaptics IoT Business Today
Synaptics does not exactly make it easy to understand, especially after the company decided to re-categorize how it tracks revenue in Q1-2024. (Note that Synaptics follows a weird fiscal year that ends in August, so the company recently completed Q1-2024, while most companies have yet to report 2023 year-end results.)
Suddenly, IoT revenues drop from a high of 70% as of 2023 to just 23% in what Synaptics calls its core IoT business after the reshuffling. Officially, the company made the change to “align external reporting groups with the strategic focus of the company on a go-forward basis.” Yet Synaptics says it operates just one business: the development, marketing, and sale of semiconductor products used in electronic devices and products. Whatever all this mumbo jumbo corporate speak means, it begs the question: Is Synaptics an IoT company or not, especially if core IoT sales have declined over the last several quarters based on the retro realignment?
The answer is probably “yes,” if you drill into its biggest segment, Enterprise and Automotive, which encompasses a range of technologies beyond the company’s legacy human-interface products. For instance, Synaptics offers a number of wireless solutions and applications for connected cars and smart office management. As we often note, IoT encompasses a broad range of wireless, connected technologies these days, so just about any digital widget could fall into the category.
The company seems to reserve core IoT for sensors and wireless products with applications for smart factories, smart buildings, and smart cities, among other markets. There is also a strong emphasis on edge computing by engineering low-power hardware that can run AI algorithms locally. Specifically, Synaptics is attempting to take the lead on more cutting-edge edge AI like visual wake words. Rather than use speech recognition to enable an app, sensors employ computer vision to “wake” an application in proximity to a person – without the need to be connected.
Should You Buy Synaptics Stock?
Pretty cool stuff, no doubt, but you can see where it becomes difficult to tease out IoT revenue from non-IoT revenue across these segments. Maybe it’s all semantics, but it’s relevant if we’re after a pure-play IoT stock, even if no one can quite agree on the definition. (For the record, we’re not looking to add an IoT stock at this time. We’ve maxed out our current IoT positions in the Nanalyze Disruptive Tech Portfolio and IoT stocks currently represent our second-biggest exposure.) Synaptics believes its biggest opportunity through the end of this decade is in its core IoT business that sells processors and wireless products.
The other markets have limited upside at this stage, so investors should measure success (or lack thereof) as the company reports core IoT metrics in the coming quarters. Right now, things are headed in the wrong direction on most fronts. Of course, management is promising a big bounce back in the next few quarters, as excess inventory clears out and customers loosen their purse strings with the weakening of the macroeconomic headwinds. Still, it’s hard to imagine things will turn around that quickly given the enormous drop between Q1-2023 and Q1-2024. What the hell happened in Taiwan and Japan, for instance? Analysts pitching softballs during the Q1-2024 earnings call did not mention either of these major market drops.
Underlying some of these numbers is the big customer concentration risk that Synaptics stock carries. Sales to two customers accounted for 29% of Q1-2024 revenues, while just five original equipment manufacturers (OEMs) represented 40% of first-quarter revenues. Gross margins are also suffering at about 45% in the most recent quarter compared to more than 57% a year ago. The share price of Synaptics stock reflects these downward trends, trading at a simple valuation ratio (SVR) ($4 billion market cap/$950 million in annualized revenue) of about 4. That’s below our catalog average of 6.5, so we wouldn’t say the stock is overvalued right now.
Conclusion
The Synaptics pivot reminds us of the IBM pivot to hybrid cloud. It’s a bit like watching dinosaurs trying to evolve over the course of decades rather than millions of years. Synaptics would seem to have the better chance of the two to turn things around, especially since it is not as heavily burdened by long-term debt ($1.3 billion versus more than $48 billion by IBM) or dividend payments to shareholders. Still, the precipitous drop in revenue following a dramatic climb just the year before feels like retail investors will be on a roller coaster ride for the foreseeable future.
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