Why You Should Be Staying Away From This IoT Stock

Synaptics (NASDAQ: SYNA) has been trying to turn its business around for quite some time, trying one play after the other. But the chipmaker has been hamstrung by the weakness in the smartphone market, while its foray into the Internet of Things (IoT) hasn't borne much fruit so far.

However, Synaptics' promise that its IoT business will start getting better from the fiscal fourth quarter seems to have raised investors' hopes since the last earnings report. So a lot is going to hinge on the view investors get on how the company's IoT business is performing when it releases its fourth-quarter fiscal 2019 results on Aug. 8.

A variety of icons representing components of the Internet of Things

Image source: Getty Images.

Synaptics says the IoT business is transitioning

During the fiscal third quarter, Synaptics' IoT revenue was down a whopping 29% year over year. The segment supplied just 19% of the company's total revenue. This is a red flag, as Synaptics has been pouring money into IoT as compared to mobile, which still accounts for 61% of total revenue.

Synaptics management blamed the IoT weakness on "product transitions" and "some residual supply chain issues." This probably means that the chipmaker is working through its older IoT chip inventory as it prepares to launch new offerings. Saleel Awsare, the senior vice president and general manager of Synaptics' IoT division, said on the last earnings conference call:

This will entail an even more pronounced effort to reshape our portfolio toward higher-margin products, with the goal of achieving meaningfully better gross margins longer-term. We already have the building blocks and customer wins in place to execute across our IoT platform, where we expect to return to growth and to drive even greater momentum across the portfolio.

So it isn't surprising to see that investors have remained upbeat about Synaptics' prospects even though the company's top- and bottom-line declines aren't showing signs of slowing. The chipmaker is projecting a 20.2% annual top-line drop for the fourth quarter, at the midpoint of its $300 million to $320 million guidance range.

Wall Street was originally expecting $362.5 million in revenue. So if Synaptics doesn't manage to deliver a substantial improvement in its IoT business this time around, investors will likely be inclined to hit the "sell" button. That's because the company's mobile business, which supplies the majority of its revenue, isn't expected to turn around anytime soon.

Mobile is in a mess

Synaptics' mobile revenue fell 16% annually during the third quarter, which isn't surprising as the broader smartphone market is not in great shape. IDC reports that smartphone shipments were down 6.6% in the first quarter of 2019, which was a steeper decline than the 4.9% drop witnessed in 2018.

OEMs (original equipment manufacturers) are reportedly cutting back on orders for smartphone chips, thanks to the weak demand environment and the ongoing U.S.-China trade war. Also, China is reportedly looking to promote domestic chipmakers to supply to its local smartphone makers, and reduce reliance on foreign chipmakers such as Synaptics.

Synaptics, however, put up a brave face last quarter. Management said the chipmaker has been scoring design wins at major smartphone OEMs for its display drivers. Also, the company's USB Type-C business will get a shot in the arm from a win at a big smartphone OEM that will use the technology in a flagship smartphone.

But it remains to be seen if these design wins will move the needle significantly for Synaptics' mobile business. After all, the company bet big on in-display fingerprint technology last year, but that didn't rescue Synaptics' mobile business as smartphone makers were reluctant to include the technology into their devices because of cost constraints. Investors will have a sharp eye out for an IoT recovery.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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