IoT And Wi-Fi 7 Will Unlock $3B Opportunity Despite Risks

Key Takeaways

• Expansion in Core IoT and connectivity solutions opens substantial market opportunities, potentially driving significant revenue growth.
  
• Strategic investments and partnerships in Edge AI IoT aim to capture market share and bolster earnings growth.
  
• Continued reliance on key customers and execution risks in market expansion might affect revenue stability and growth.

Catalysts

Develops, markets, and sells semiconductor products worldwide.

• Synaptics is expanding its Core IoT product line, with Core IoT product sales increasing 43% year-over-year, due to new design wins, which is expected to continue fueling revenue growth.
  
• The launch of Synaptics' cost-effective Veros connectivity solutions for embedded IoT applications is opening an incremental $3 billion in serviceable market opportunity, which could significantly boost future revenue.
  
• The introduction of Wi-Fi 7 for IoT applications is expected to cater to high demand in real-time, video-intensive applications and increase market adoption, potentially improving revenue streams and market share.
  
• Strategic investments in go-to-market initiatives and partnerships with ODMs and OEMs are positioning Synaptics for growth in the Edge AI IoT market, aiming to capture more market share and drive future revenue and earnings growth.
  
• The company's recent product innovations in high-end Android smartphones, PC market share gains, and strategic design wins are expected to increase content value and operating margins, contributing to earnings growth.

Synaptics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synaptics's revenue will grow by 10.2% annually over the next 3 years.
• Analysts are not forecasting that Synaptics will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Synaptics's profit margin will increase from 15.9% to the average US Semiconductor industry of 14.0% in 3 years.
• If Synaptics's profit margin were to converge on the industry average, you could expect earnings to reach $194.7 million (and earnings per share of $5.56) by about May 2028, up from $165.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 14.0x today. This future PE is lower than the current PE for the US Semiconductor industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 2.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.46%, as per the Simply Wall St company report.

Synaptics Future Earnings Per Share Growth

Risks

• Potential indirect impacts from tariff policies and the global trade environment could influence future demand and supply chain dynamics, possibly affecting revenue and earnings.
  
• Sluggish demand in the automotive market poses a challenge, which might continue to impact future revenues and net margins.
  
• Continued reliance on a few key customers in concentrated markets, such as mobile and automotive, could risk revenue stability if any major client relationships falter.
  
• While there is positive momentum, the shift towards a broad market customer base involves execution risks, which could affect revenue growth if not effectively managed.
  
• The increase in operating expenses related to transactions like the Broadcom acquisition could pressure net margins and overall earnings if expected synergies and revenue growth do not materialize.

Valuation

• The analysts have a consensus price target of $87.714 for Synaptics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $194.7 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of $59.83, the analyst price target of $87.71 is 31.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.