SYNA - Synaptics: Initiating With Buy Waiting For Enterprise Rebound

2024-01-04 10:40:00 ET

Summary

• We’re initiating Synaptics with a buy rating for longer-term investors.
• We think SYNA is well-positioned to grow its top line once enterprise and auto-related demand rebounds, aided by the PC-demand recovery.
• We see some near-term challenges but believe the company's top line has bottomed.
• We recommend investors explore entry points on pullbacks.

We're initiating Synaptics Incorporated ( SYNA ) with a buy rating; we see an increasingly favorable risk-reward profile for the stock in FY24. We think 1QFY24 results and outlook reflected that consumer weakness is spilling into enterprise demand, with core IoT sales expected to remain flattish in the range of $37M to $43M after coming in at $39M in Q1. In spite of this, we're more optimistic about SYNA now, as we expect enterprise demand to rebound in 1HFY24 and see more room for SYNA to re-accelerate its top-line growth. We think SYNA is strategically positioned with its product portfolio, ranging from ConnectSmart, Display Link, and VideoSmart, to see increased demand for its cutting-edge solutions in the post-inventory correction environment. SYNA is not without risks; the company remains highly exposed to enterprise and auto product application revenue, which is currently soft due to the inventory correction cycle. While we expect a rebound in both markets towards 2H24, we think the company is at higher risk of underperforming if the macro backdrop worsens and macro headwinds spill further into 2024.

The following outlines SYNA's net revenue from customers for each product category.

Still, we think SYNA's top-line performance has bottomed; management reported sales of $237.7M last quarter, compared to $227.3M in 4QFY23 and $327M in 3QFY23. The major correction to guidance took place in 3QFY23 when management guided sales to decline 27-36% QoQ to the range of $210-240M versus consensus of $330.8M. For next quarter, management guides for sales in the range of $220-250M with a mid-point of $235M, trailing consensus expectations at $240M. We expect the demand environment to rebound as the inventory correction cycle for enterprise and auto markets complete. We see growth in mobile-related revenues after sales declined 15% QoQ last quarter due to inventory digestion; now, management guides mobile-related sales to grow 20-35% QoQ next quarter. We see a more attractive risk-reward profile for the stock and recommend investors add opportunistically.

The following outlines SYNA's quarterly revenue trend.

The stock outperforms the S&P 500 and SOX index over the past six months and over the past three months by 15% and 10%, respectively. We expect outperformance to continue in 2024. The following graph outlines SYNA stock against the S&P 500 and SOX over the past three months.

Valuation

SYNA is relatively cheap, trading below the peer group average. On a P/E basis, the stock is trading at 21.1x C2023 EPS $5.27 compared to the peer group average of 43.4x. The stock is trading at 3.8x EV/C2023 sales versus the peer group average of 6.3x. We think SYNA is fairly valued at current levels and believe the worst of enterprise weakness has been priced into the outlook for the next quarter. We recommend investors begin exploring entry points into the stock on pullbacks.

The following outlines SYNA's valuation against the peer group average.

Word on Wall Street

Wall Street shares our bullish sentiment on the stock. Of the 13 analysts covering the stock, eight are buy-rated, and the remaining are hold-rated. The stock is currently priced at $111 per share. The median sell-side price target is $113, while the mean is $111, with a potential 1% upside.

The following charts outline Wall Street's sentiment on the stock.

What to Do With the Stock

We're initiating SYNA with a buy rating. We see more room for the company to outperform in 2HFY24 as enterprise and auto markets rebound post-inventory correction. We still see some near-term challenges for the stock that may weigh on stock price, but we recommend investors explore entry points into the stock on pullbacks.

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