Synaptics Looks Like Icarus Now, But Could Become A Phoenix Again

When it comes to semiconductors, whatever the market gives during the booms it can take away during the busts, and Synaptics (NASDAQ:SYNA) shareholders have been experiencing that over the past year as the shares have been hammered on weakening consumer electronics markets. Down about a third since my last update, the shares have erased significant outperformance over the SOX index and are down more than 70% this year.

I understand the concern over weak PC and mobile demand, not to mention weakening consumer IoT demand. Likewise, I understand the fears that the aggressive pricing realizations that Synaptics took in 2021-2022, and that boosted gross margins above management’s prior long-term targets, will unwind. Those fears are fair to a point, but I think the share price now overlooks the longer-term opportunities in IoT that management has already shown it can successfully target. It may take another six months or so for investors to come back to this name, and maybe longer, but the valuation here.

 

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Synaptics Looks Like Icarus Now, But Could Become A Phoenix Again

Synaptics Executing Well On A Higher-Growth, Higher-Margin Model And Not Getting Full Credit

Synaptics (SYNA) is doing what many semiconductor companies struggle to do – meaningfully remaking itself into a higher-margin player in more defensible, faster-growing market segments. Many companies have struggled to successfully disengage from a heavy revenue reliance on Apple (AAPL), and likewise many chip companies have found it hard to transition away from consumer markets where “fast follower” Asian rivals quickly compete away margins. Synaptics, though, has executed on this transition quite well over the last couple of years.

Cheap stocks are all but impossible to find in the semiconductor space today, and there are still significant questions about the growth opportunities in areas like Mobile and PC for Synaptics over the next couple of years. Nevertheless, I do believe the company’s IoT business is set to generate strong growth, and I believe mid-to-high single-digit long-term revenue growth is possible here, and with higher margins.

There’s more modeling risk with businesses in transition/transformation, but I see near-term upside into the $140’s here and longer-term total annualized return potential in the high single-digits.

 

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Synaptics Executing Well On A Higher-Growth, Higher-Margin Model And Not Getting Full Credit

Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Battered power management semiconductor company Dialog Semiconductor (OTCPK:DLGNF

) (DLGS.XE) has done a little better since my last update on the company, as the market has reacted positively to a favorable second quarter pre-announcement, and now, the announcement that it has terminated merger discussions with Synaptics (SYNA).

Overpaying for Synaptics wasn’t going to help Dialog, but Dialog does still need a lot of self-help. The company is looking at a steep downward turn in power management integrated circuit (or PMIC) revenue from Apple (AAPL), and the company is a long way from solid traction in markets outside mobile (and/or with customers other than Apple). Although the shares no longer trade at a discount to zero value in the mobile business, there could still be upside if Dialog can grow its rapid charging, connectivity, and auto/industrial businesses and/or find a new M&A dance partner.

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Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Dialog Semiconductor On The Clock

A year ago, the debate around Dialog Semiconductor (OTCPK:DLGNF) was whether or not there was any substance to bearish rumors and predictions that Apple (AAPL) was working on its own power management integrated circuits (or PMICs) and would use them to replace Dialog’s chips in its iPhones and other products. With Apple having since done exactly that (although not completely), now the debate is how far the substitutions will go and what Dialog can do to preserve and rebuild its business absent contributions from Apple that have historically made up 70% or more of revenue (and high-margin revenue at that).

Both Dialog and Synaptics (SYNA) have confirmed that they’re discussing a merger; while Synaptics has been a frequent-flier on sell-side “likely to be bought” charts, and there would be potential synergies in such a deal, Dialog’s iffy history in M&A doesn’t lend a lot of confidence. The good news, such as it is, though, is that the market is already pricing in a very dire outlook for this beaten-up chip company.

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Dialog Semiconductor On The Clock

Seeking Alpha: Atmel Now An Execution Story

Opportunity is not the problem for Atmel (ATML). There are multiple growth avenues for the company's large microcontroller business, not the least of which is the Internet of Things (or IoT) opportunity. There is also still an opportunity for Atmel to make good on the potential of XSense, participate in auto market growth, and continue to wring cash from its memory business.

The problem is execution. The company's touch business, and XSense in particular, haven't developed as hoped and the company has more of a recent history of promising rather than delivering. The potential is there to take this stock to $10 (or higher), and management compensation appears aligned with investor interests, but Wall Street seems to be sliding into a "show me" skepticism with this company and this stock.

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Atmel Now An Execution Story

Seeking Alpha: Atmel Looks To Maintain Its Momentum Post-CES

Microcontroller and touch specialist Atmel (ATML) had a bumpy 2013, but rode a solid wave of enthusiasm into the recent Consumer Electronics Show that has the stock up more than 10% year-to-date. I see some solid reasons to be optimistic about the company's efforts in touch, as well as its underappreciated MCU business. The pace and magnitude of gross margin improvements are significant unknowns, though, and there is ample competition in the touch space.

Atmel is not the cheapest chip stock out there, but progress with touch control and sensor attach rates will likely be well-rewarded by the market. Double-digit free cash flow growth can support a fair value in the $9.50 to $10 range, and although I can't make as strong of a valuation-based call here as I might like, I think the set up for 2014 is attractive.

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Atmel Looks To Maintain Its Momentum Post-CES

Seeking Alpha: Atmel Needs To Show That Touch Can Be A Growth Business Again

While Atmel (ATML) has looked for touch controllers/sensors in mobile devices to build on its core microcontroller business and reignite some growth, that plan hasn't exactly gone to plan. Atmel has done a good job of developing new technologies like maXTouch, but the company has not yet broken out of a cycle where the higher-end touch companies like Atmel, Synaptics (SYNA) and Cypress (CY) play leapfrog with each other on each new device iteration (gaining and losing sockets) before eventually seeing lower-ASP rivals catch up.

At the same time, the underlying recovery for non-touch microcontrollers has been a touch-and-go affair in end markets like industrial, wireless, consumer devices and so on. While Atmel continues to offer leverage to both a more general chip demand recovery as well as company-specific drivers like improved margins and acceptance of its new XSense technology, the slowdown in high-end handsets and the very slow adoption of touch-enabled laptops/notebook computers still make this a challenging investment thesis.

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Atmel Needs To Show That Touch Can Be A Growth Business Again

Investopedia: The Bar Is Rising For Atmel Again

Unless your name is Qualcomm (Nasdaq:QCOM), serving the wireless device market is a tricky proposition, as constant ASP erosion is a fact of life and the prospect of losing sockets always looms. Investors in Atmel (Nasdaq:ATML) have seen that firsthand, as this large microcontroller company has suffered from competitive socket losses and market shifts toward cheaper alternatives. With new product opportunities on the way and the prospect of improving operating leverage, though, these shares have started to recover. The question for investors is whether the company can deliver even more upside than these improving expectations incorporate.

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Investopedia: A Step Back For Atmel, But The Potential Is Interesting

It's another one-step forward, one-step back quarter for Atmel (Nasdaq:ATML), as this mid-sized microcontroller specialist continues to struggle with increased commoditization in its touch controller market and a weak environment for chips in industrial and automotive markets. While these shares are likely to stay quite volatile on rumors of socket wins and losses, the company's technology is interesting and the valuation is not so demanding at present.

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Investopedia: Atmel Still Caught Between Good And Bad Touch

It seems like every quarter only serves to heighten the anxiety and uncertainty around Atmel (Nasdaq:ATML). Despite leading touch controller technology, the company seems caught up in a market where price rules and customers swap slots freely. Although this semiconductor stock could be a great rebound candidate if the revenue outlook firms up, it's now firmly a "show me" stock.

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Investopedia: Atmel's Ironic Warning

Here's a riddle for investors: when is bad news actually good news? The answer: When the bad news is less bad than already feared. That very much seems to be the case for Atmel (Nasdaq:ATML) this Friday, as this small semiconductor's stock has actually held up quite well, despite a sizable revision to sales guidance for the fourth quarter.

The Bad News 

Atmel announced that fourth quarter revenue was going to be approximately $384 million for the fourth quarter; not only down 20% from the third quarter, but quite a bit lower than the average analyst estimate ($412 million) and the lowest estimate ($403 million).

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Investopedia: Atmel's Investment Case Is Touch And Go

For years bears have been waiting for Atmel (Nasdaq:ATML) to come up with some sort of product to really stand out from the crowd. Now that they have it, the worries have shifted to whether the company may become too dependent on them and risk losing share to a host of would-be rivals. Although Atmel is not the safest pick in the chip space, several potential market rebounds could drive better results in 2012 and 2013.

Good Touch and Bad Touch  
Atmel's maXTouch solutions for touchscreen controllers have definitely spiced up its microcontroller business, though it is not the largest business yet. In this case the name is pretty self-explanatory; maXTouch chips allow for the touchscreen interfaces that are now so commonplace in smartphones and tablets. Atmel has garnered an early lead in this fast-growing market, in part due to technology good enough to get it in eight of the top 10 phones in early 2011.

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Investopedia: Buy Into Atmel's Doubts

As 2011 winds down, it looks as if few, if any, chip stocks will escape the malaise. Cavium (Nasdaq: CAVM) reported a slowdown in its business just a little while ago, and now Atmel (Nasdaq: ATML) has missed its revenue target and issued sharply lower guidance for the next quarter. Although there are plenty of doubts around this company, and more now with the revised guidance, it's hard to make money in slam-dunk stories; risk-tolerant investors ought to consider stepping up and buying this name on weakness.

Hitting a Wall in the Third Quarter 

Atmel announced that revenue rose 15% from last year (adjusting for a spinoff), and was basically flat on a sequential basis, a result that was about 1% shy of the average Wall Street guess. Microcontrollers were fairly strong, up 18% from last year and flat sequentially, with 8-bit showing more sequential strength. Non-volatile memory and RF/auto were both down sequentially, while ASIC showed solid growth, but comprises a small amount of total revenue.

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Investopedia: Atmel Getting Closer To A Sweet Spot

It is often remarkable that people who are entrusted with the responsibility of running millions (if not billions) of dollars are often so easily spooked. Right now, tech investors are running scared when it comes to the chip sector, leaving names like Broadcom (Nasdaq:BRCM) on the outs. Apparently Atmel (Nasdaq:ATML) can go on that list now too: Even though the company reported good results and consistent guidance, Wall Street does not seem overly impressed.


A Strong Start to the Year
Atmel reported revenue for the first quarter that just nearly matched the highest estimate and did surpass the average guess. Revenue grew just 1% on a sequential basis, while rising about 43% from last year on a like-for-like basis.

Growth was again led by the microcontroller business; now nearly two-thirds of the company's revenue base, microcontroller revenue was up 2% sequentially. Better still, the company's 32-bit microcontroller business was up 20% sequentially and the company continues to log impressive design wins in the smartphone and tablet industry. Non-volatile memory actually grew better than microcontrollers, while ASIC was the only segment to decline on a sequential basis. (For related reading, check out A Good Opportunity For Broadcom?)


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Atmel Lives Up To Expectations ... And Then Some

What is the best thing a company can do when its shares look overvalued? Deliver excellent quarters with better-than-expected performance and grow into that valuation. That seems to be the theme for microcontroller maven Atmel (Nasdaq:ATML), as a great earnings report should help maintain what has been torrid momentum in the second half of this year. 

Nothing "Micro" About The Quarter
Despite plenty of evidence from analog giants like Linear Technology (Nasdaq:LLTC) and Texas Instruments (NYSE:TXN) that ship-ahead risks may prove real in many sectors (especially computers, but also industrial and automotive to some extent), Atmel logged a fine quarter and guided toward sequential growth.

Revenue jumped 40% this quarter on an annual basis, and 13% sequentially. The microcontroller business was even stronger, with 29% sequential growth and nearly $256 million in revenue contributions. All in all, it was good enough for a 4% beat, relative to analysts' expectations. (For more, see Strategies For Quarterly Earnings Season.)


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