Synaptics Incorporated stock (NASDAQ: SYNA) is up 34% since the beginning of this year, trading at $88 as of markets close on September 2nd, and we believe that Synaptics stock has a significant downside.
Why is that? Our belief stems from the fact that Synaptics’ stock has risen almost 2.5x from the low seen in early 2019. Our dashboard What Factors Drove 137% Change In Synaptics Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Synaptics is a manufacturer of human interface hardware and software such as touchpads. display drivers, and fingerprint technology. The stock rise over the past 2 years came despite an 18% drop in Synaptics’ revenues, which combined with a 2% drop in the outstanding share count, led to a 17% fall in revenue per share (RPS) from 2018 to 2020.
However, Synaptics’ P/S ratio rose from about 0.8x at the end of 2018 to 1.5x at the end of 2019, and has risen further to 2.2x now. This rise came due to the company’s improved profitability, with EPS rising from -$3.63 in 2018 to $3.54 in 2020, on the back of rising gross margins and a drop in the effective tax rate. However, given the volatility of the current situation, there is possible downside for Synaptics’ multiple when compared to levels seen in the past years – P/S of 0.8x at the end of 2018, and 1.5x as recently as 2019.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus, and the resulting lock downs and quarantine has led to a drop in demand for computing devices. Further, the rise in competitors in the human interface market has led to a drop in selling prices, weighing down company revenue. While Synaptics has managed to offset the drop in revenue with a sharper drop in expenses to improve profitability, we expect the revenue drop to continue going forward. We believe Synaptics’ Q1 results in October will confirm this and will also likely accompany a lower 2021 guidance.
Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 2.2x to around 1.9x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $75.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.