Redstone's Iyer Starts Synaptics With Buy-Equivalent, Sees 'Huge' Biometrics Opportunity

Jagadish Iyer of Redstone Technology Research started coverage of Synaptics, Incorporated SYNA with a Positive rating and $103 price target, saying the company will benefit from secular growth in their core markets.

In a client note, Iyer said, "As biometrics adoption rises across smartphones, tablets, PC's and autos, we expect industry wide units to grow from 275m in 2015 to 1.7bn by 2019 (CAGR 44%), driving overall market to double this year to $1.4bn and grow another 50% next year. We see this as a huge opportunity for Synaptics, as its own biometric segment revenues should rise from $280m in CY15 to over $700m in CY17 as its presence expands beyond Korea into China."

Iyer added, "Our checks in China also indicate handset vendors are increasingly pushing for dual sourcing, which bodes well for Synaptics (FPC is a leader there). In the case of TDDI, where the market is expected to grow to $1.7bn by 2019 from de minimis levels last year, we see Synaptics capturing 40% share of the market over the next 3-4 years."

The analyst expects overall gross margins to improve at least by 200-300bps over next 6-8 quarters enabling 40 percent EPS growth by FY17 from FY15 levels as Touch and Display driver (TDDI) and Biometrics revenue mix improves from under 30 percent combined to over 60 percent in the next few years.

The analyst, citing industry research, listed some key reasons for Synaptics product adoption:

• Broad portfolio of biometric products (sizes and shapes) to address various needs such as, for example, placing sensors in the front or back of the phone.

• The increasing drive towards mobile payments, which in turn drives the need for enhanced security to prevent against malware.

Iyer said, "With Synaptics incorporating the security aspect in the biometric sensor itself and then matching with the host for authentication, we believe the product offering will be much more robust against electronic and physical hack attacks."

"We, therefore, expect Synaptics market share in biometrics to gradually improve over the next two to three years. Given biometrics is 15-20% of revenues in any given quarter and with product gross margins much higher than corporate (> 40%), we anticipate this growth in biometric revenues bodes well for corporate margins, as it should continue to impact positively," he elaborated.

With the industry moving towards elimination of home button in the smartphone, the analyst expects Synaptics to benefit as it rolls out biometric capability in smartphones underneath glass.

'Maniacally' Focused

Meanwhile, Iyer noted that though Synaptics has been "maniacally" focused in Korea with strong presence in Samsung Electronics SSNLF and LG Electronics LGEAF, it is now doubling its efforts in China after its initial win at Lenovo Group Limited (ADR) LNVGY.

According to the analyst, the company has most recently won a socket at Huawei and all his checks indicate that Chinese handset vendors now want multiple vendors besides relying solely on the market leader Fingerprint Cards.

"Based on our estimate that Huawei could ship 90-100m phones this year and conservatively even if Synaptics gets 10-15% share, we estimate an incremental $30-$45m is likely from just this vendor alone this year. We, therefore, expect Synaptics to increase its presence in China this year and into next year from multiple handset/tablet vendors as it gains share," Iyer added.

According to TipRanks, Iyer is rated five stars and ranked 64 out of 3,863 analysts. TipRanks says Iyer's success rate is 72 percent, with average return per recommendation at +28.8 percent.

Shares of Synaptics fell 2.43 percent to $75.61.