Sunday, 18 June 2017

Synaptics: Buy the Dip

Synaptics Inc (NASDAQ: SYNA)
Technology; Human Interface Solutions; 30%-50% Upside

IoT exposure, strong margin and cheap valuation put the company in value territory.

Synaptics Inc. (SYNA) lost more than 20% of its market cap in the last five days after acquiring Conexant Systems and Marvell Technology Group (MRVL) for a cumulative cash compensation of $395 million along with share-based compensation. You can see the detailed update here.

Synaptics also narrowed its midpoint revenue guidance for the fourth quarter of 2017. Cash spending, dilution and guidance revision were all too much for the market, and the reaction was ugly for Synaptics’ shareholders. The selling was not completely rational as the market just focused on the bad side and ignored the good one.

Acquiring growth bodes well for Synaptics
Synaptics has always been aggressive in terms of new acquisitions. This paid off for the company most of the time. In 2013 the acquisition of Validity Inc., a fingerprint sensor solution company, exposed Synaptics to the fingerprint market; that market started to take off. Further, the Renesas acquisition allowed Synaptics to built TDDI capabilities, which is currently another growing market for the company. The aggressive acquisition strategy allows Synaptics to stay ahead of the competition. The Conexant and Marvell acquisitions will exactly do that for the company in IoT space.

Other potential benefits overlooked by the market
New acquisitions will, at the minimum, add $198 million in recurring revenue. But this is the base case as IoT growth and home automation growth will boost the revenue above and beyond that. 

Post acquisition margin is expected to be stronger than the current margin as management confidentially said that margin expansion will follow as a consequence of this acquisition. 

Acquisition will result in synergy and cost savings amid elimination of duplicate functions across the organization. This will improve the bottom line of the company, boosting the EPS.

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