Best known as a maker of high quality notebook PC touchpads, SYNA saw its sales and profitability move into overdrive in 2004 thanks to the hugely successful launch of Apple's (AAPL) iPod MP3 player. The iPod provided SYNA with a new market for its touchpad technology, and this achievement was quickly followed by design wins at numerous other MP3 player makers. Profitability soared at SYNA, with profits more than doubling year-over-year. The stock quickly followed.
The party fizzled earlier this year when rumors emerged that AAPL was evaluating alternative touchpad providers. SYNA shares quickly fell from over $40 to the low $20s, and none of SYNA's former analyst fans on Wall Street were willing to step up and defend the stock. SYNA shares have since bounced around the low $20 range, trading today up a dime at $19.80 per share.
Although it's still not entirely clear what will happen with the company's relationship with AAPL, SYNA's management has said that AAPL is considering its options. SYNA also withdrew its quarterly guidance, and management was cautious on its last conference call. Accounting for nearly a third of SYNA's 2004 revenues in 2004, the AAPL relationship is obviously very important to SYNA. For now, the two companies continue to work together.
Outside of AAPL, things continue to go well for SYNA. The notebook PC business has been strong, and SYNA has continued to secure design wins in the MP3 space. More recently, SYNA also disclosed that it has gained its first mobile phone design win. This product is expected to hit the market next quarter, and while management was unwilling to provide any financial visibility on the deal, the CEO hinted that he thought the deal could be material by the end of the year. This represents a major significant wildcard for the company.
Financially, SYNA remains well positioned. The company has more than $100 million in net cash on hand, recently implemented a $50 million stock buyback, and should earn more than $1.15 per share in earnings during the current fiscal year (ending June 30th). SYNA's enterprise value currently checks in at $400 million, or just over $15 per share. The company also holds a "low double-digit" stake in Foveon, a private imaging startup of which technologist George Gilder is a huge fan and about which he recently wrote a book.
In summary, SYNA has clearly made significant strides over the past 18 months. The company has successfully added a second significant market (MP3 players) to its reach, and mobile phones could become a third major market. SYNA has significantly bulked up in size, while further improving its already strong balance sheet. The question mark really is AAPL. Many investors are clearly trying to price in the risk in the event that SYNA loses all of its business with AAPL. This is a possibility, albeit a fairly slim one in our view. More likely, AAPL will add a second source to its supplier list (SYNA already deals with this type of competition at places like Dell on a regular business - it's typical), leading to reduced volumes and tighter margins. SYNA is also likely going to see a normalization of margins in its MP3 business as competitors make in-roads and the space slows from its hyper-growth rate.
If you believe that SYNA is only going to be second sourced, and not dropped entirely from AAPL, the stock is probably undervalued by 10% to 30% at current levels. This would assume a 17-20x enterprise value multiple on a conservative $1 per share in 2006 fiscal year earnings. From there, you have further upside if the mobile phone product catches fire, as well as ongoing leverage to growth in the notebook and MP3 markets.
Without AAPL entirely, SYNA is probably only worth $15 to $16 per share. This would assume a 15x enterprise value earnings multiple on 75 cents per share in 2006 earnings. The real risk in this scenario is what it would say about the defensibility of SYNA's technology, and thus the actual multiple in this scenario could be even lower. Again, we think this doomsday scenario is unlikely, but it's good to understand the downside risks.
In our view, we think the more positive second source scenario probably has an 80% or greater chance of happening. Thus, at current levels, we'd argue that SYNA shares are probably an attractive risk for aggressive minded investors, if you agree with our valuation assessments. Further, if the mobile phone product is a hit, the upside reward could be even greater.
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