Tuesday, October 13, 2009

Synaptics (NASDAQ:SYNA): Downgraded to Underperform at Jefferies

Jefferies is downgrading Synaptics (NASDAQ:SYNA) to Underperform from Hold and lowering price target to $16 from $26:

Downgrading to Underperform (from Hold) after a round of channel checks into the capacitive touch screen market. We believe CQ4 orders are tracking below guidance with stronger headwinds in 2010 due to share loss and a negative mix shift to modules likely driving another leg down in the stock.

- Capacitive touch screen market likely larger our previous expectations with a faster shift to chips from modules. Our checks suggest the capacitive touch screen market continues to expand and is likely larger than our previous expectations as (1) handset OEMs push touch capabilities into even low-end phones and (2) handset OEMs move more quickly to capacitive screens. We have increased our capacitive touch screen forecast to 84MM (from 50MM) in CY09 and 188MM (from 100MM) in CY10 (See Exhibit 1). Our checks suggest the market is moving faster to chip solutions (from modules) likely driving additional share loss and ASP compression for Synaptics.

- Downgrading to Underperform - Cracks in fundamentals only getting started. We are downgrading Synaptics to Underperform (from Hold) as our checks suggest its business has deteriorated further since our downgrade in late July. We believe orders for its December quarter are tracking in the $130-135MM (+10-15% Q/Q) range, below implied guidance of $140MM, likely driven by inventory issues at LG and a delay in the ramp of its two high profile wins at Nokia (X6) and RIM (Storm 2). Looking into 2010, our checks suggest stronger headwinds due to (1) a faster mix shift to lower ASP module solutions (chip ASP of $1-1.50 vs. module of $4-7), particularly at LG which had been the last module holdout and (2) increased competition and share loss at LG, HTC, and RIM (see Exhibit 2). Despite our expectations for significant unit growth in the capacitive touch market of over 100+% Y/Y in 2010, we believe these headwinds cause Synaptics' mobile business to be only flat Y/Y (units up 25-30% Y/Y with blended ASPs down 20%) and we have reduced our estimates.

- Expect inline CQ3 results with CQ4 guidance below. We believe CQ3 results will be roughly inline with our est and St. of $117MM/$0.41 yet believe CQ4 guidance will be below St. of $139MM/$0.60. We lowered our CQ4 est to $132MM/$0.53 and decreased our St. low CY10 est to $476MM/$1.63 vs. St. of $560MM/$2.30 to reflect our reduced mobile estimates.

Action: This is a strong call that should be read by all the shareholders of Synaptics. Pressure on ASPs and margin is neverever a good sign for a technology company and is almost always followed by share price decline. Even the increase in units doesn't help due to shift to module solutions that have way lower ASPs.

Basically the stock is in nobody's land. It isn't a growth story, it isn't a margin expansion story, it isn't a share gain story.. so basically there aren't many logical owners of the shares. One might be tempted to see some valuation support but the future earnings are very difficult to predict.

The shares already saw a huge decline after the problems first came evident with guidance for F1Q10 & FY10 but there should be more downside ahead. I would expect the shares to decline at least 5% today, possibly even 7+%. So if the market allows you to get fills for shorts at around 3% below yesterday's close, these should be worth taking.

1 comment:

  1. Looks like it is going to gap down ~6%, a bit too much for my taste. With close to 50% short interest it might bounce after the open, giving better entry. I would start shorting around $22.50 and add if it goes higher. This bounce should be short-lived and peak around 15-30 minutes after the open.