shares tangled (Son 5.28%) It was reached in 2022 amid a massive stock market sell-off, but the chip maker’s latest results suggest it could be a long-term winner thanks to its impressive growth drivers.
The company, whose chips are used in multiple applications such as the Internet of Things (IoT), smartphones and personal computers (PCs), reported astounding growth May 5 when it released results for the third quarter of its fiscal year 2022, which ended in March. 26. Synaptics’ numbers were better than what Wall Street was looking for, and its guidance also exceeded expectations.
Synaptics is working to meet the growing demand for IoT chips
Synaptics reported third-quarter financial revenue of $470 million, up 44% over the same period last year. The company’s adjusted earnings jumped 85% year over year to $3.75 per share. Analysts were looking for $3.55 per share in earnings on $464.6 million in revenue. The impressive growth in Synaptics’ top and bottom earnings was driven by strong demand from the Internet of Things segment, which generated 64% of Synaptics’ revenue last quarter.
The chipmaker’s Internet of Things revenue was up 99% year-over-year to a record $302 million last quarter. The healthy growth of the Internet of Things business has also positively impacted the company’s margins and profits. The non-GAAP gross margin exceeded 60% for the first time in the company’s history in the third fiscal quarter.
The company exited the quarter with an adjusted gross margin of 61.1%, which is a significant increase over the same period last year’s reading of 55.1%. Even better, management’s guidance suggests it will maintain those strong margins. Synaptics expects its fiscal fourth-quarter gross profit margin to fall at 61% in the middle of its guidance range. This would be a good improvement over the previous period’s figure of 57.5%.
Furthermore, Synaptics’ revenue guidance of $475 million is also strong. That equates to 45% year-over-year growth and easily exceeds the analyst consensus estimate of $466.7 million. It’s also worth noting that the IoT business is expected to generate 69% of the company’s revenue this quarter, compared to 50% a year ago, which explains why Synaptics is expecting an impressive showing in its top and bottom earnings.
Most importantly, Synaptics’ IoT business still has plenty of room for growth as its chips power rapidly growing applications.
Strong long-term growth is possible
The growing demand for wireless connectivity will continue to be a tailwind for Synaptics’ IoT business. For example, the company is seeing strong demand for the Wi-Fi 6E combo chipset and is pushing the envelope on the product development front by including support for Bluetooth and Zigbee connectivity.
The demand for these communication chips is expected to grow rapidly. In September, the Grand View Research report predicted that the Wi-Fi 6 and Wi-Fi 6E market could record nearly 20% annual growth through 2028. Meanwhile, Mordor Intelligence report predicts that the Zigbee communication protocol market will grow at an annual rate of 12.6 % until 2026.
Leverage Synaptics’ presence in other lucrative areas such as virtual reality headsets and car displays, and it’s easy to understand why the chip maker’s profits are expected to grow at an annual pace of 15% over the next five years. However, it would not be surprising to see it grow faster as it is gaining traction in potentially huge markets.
Synaptics VR monitor drivers are in high demand, and management believes they are well positioned to take advantage of this emerging opportunity thanks to their already healthy market share. The company also claims to have achieved multiple design victories in the automotive market that should help it maintain its dominant position in the field. Synaptics says auto customers will start making cars with its chips in the second half of the year, which will give its growth another boost.
Ultimately, Synaptics appears to be able to maintain its high growth pace over the long term. That’s why investors should consider acquiring Synaptics shares now, as they are trading at only 10x forward earnings, compared to Standard & Poor’s 500Forward profit double 18.