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Forget Apple
and RIMM: Buy This Smartphone Stock
Instead
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Published: October 29, 2010
It's time to write
the obituary for traditional cell phones. Apple (Nasdaq: AAPL)
has changed the game with its iPhone, and there are now a raft
of other smartphones on the market as well.
My favorite play on this theme is Synaptics (Nasdaq: SYNA),
which was a pioneer in touch-screen technology. The company is
not without its detractors (as I'll detail in a moment), but it
is a proven play on the touch-screen revolution.
Until recently, Synaptics was a clear-cut growth story. Sales
rose from $185 million in fiscal (June) 2006, to $267 million in
fiscal 2007, to $473 million by fiscal 2009. But the global
slowdown, coupled with increasing competition, led to a sharp
slowdown in sales growth this past year to just +9%. The market
for touch-screen technology should rebound nicely in 2011 as new
devices hit the market, but Synaptics is now dealing with a host
of new competitors, including Atmel (Nasdaq: ATML) and
Cypress Semi (NYSE: CY). So the company has had to deal with
a smaller slice of a much larger pie. That means sales are only
expected to rise +10% to +15% this year and next.
Yet investors may be
underestimating the changing nature of computing. Notebook sales
are slumping because consumers have already started (or will
soon be) buying tablet computers to replace them. The key
difference between notebooks and these tablets: touch-screens.
Who needs a keyboard when you can simply tap on what you want?
Apple may have kick-started the tablet computer industry, but a
much broader onslaught is about to arrive. The likes of
Hewlett-Packard (NYSE: HPQ), Dell (Nasdaq: DELL),
Samsung, Research In Motion (Nasdaq: RIMM) and others are
all rolling out tablet computers. And as they're much larger
than smartphones, touch-screen makers like Synaptics can charge
a lot more for touch-sensitive glass.
Yet the company's detractors question whether Synaptics can
replicate its success in the tablet market. The company has not
formally announced any major design wins, but you need to know
how the tech industry works to see why that hasn't happened yet.
Tech vendors unveil technologies that must go through a six to
12-month testing phase with clients. Synaptics unveiled its new
ClearPad tablet touch screen in late July, and it is simply too
soon for customers to announce that Synaptics' technology will
be used. But if history is any guide, Synaptics' heavy R&D means
that the ClearPad has features that many rivals lack, such as
precise inputting, the ability to read the movements of 10
fingers, and very fast response time. As design wins eventually
roll in, the company's languishing stock, which is off -20%
since early August, should rebound nicely.
Solid cash flow
Whether the company grows at a +10% clip or a +25% clip, you can
be sure that
cash flow will be prodigious.
Free cash flow has
risen every single year since fiscal 2007 and now exceeds $100
million annually. That has pushed the company's cash balance up
to more than $7 a share, which has enabled it to announce ever
larger stock buybacks.
Action to Take --> Synaptics' shares are a good
growth story, trading at around 10 times projected fiscal 2012
profits. As the company is increasingly seen as a play on tablet
computers, that multiple should expand. An expansion in the
price-to-earnings (P/E) ratio up to 15 implies +50% upside,
which could be reached once new tablet computer design wins are
announced.
-- David Sterman
Staff Writer
StreetAuthority
P.S. -- For the past few weeks we've been telling you
about some of the hottest investment opportunities for 2011.
From tiny nuclear power plants that can be buried in your lawn,
to revolutionary pain killers made from cobra venom, we're
convinced the companies behind these products will soar in the
coming year. To get briefed on these opportunities, and several
others that we think could return many times your money,
please read this memo. |
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