Synaptics’ Pivot to Consumer Internet of Things Brings New Hope for the Incumbent Chipmaker

Analyst

Victoria Radke

Sector Strategist

Abhinav Davuluri

Synaptics is an emerging provider of audio, video, automotive, docking, and wireless products for the consumer Internet of Things market, and to a decreasing extent, a developer of touch, display, and fingerprint solutions for the mobile device and PC markets. As the mobile and PC markets mature and growth opportunities diminish, Synaptics has focused investment efforts and resources on consumer Internet of Things, particularly on automotive, smart homes, and low power edge artificial intelligence, which we view favorably. We think the firm is well-positioned to capitalize on the secular trends toward smart devices and experience-centric products in its Internet of Things end markets. We note that competition is increasing steadily in these growing markets. As a result, we do not think the company has a moat.

With the acquisitions of Conexant, Marvell’s multimedia solutions business, DisplayLink (universal docking and video compression technology), and Broadcom’s wireless connectivity Internet of Things business, the firm smartly diversified and expanded its Internet of Things portfolio in recent years. The current growth initiatives in this vector combine the Internet of Things products with AI capabilities to enable processing of human interface interactions at the edge of the network. We expect the success of this technological combination to be decisive in Synaptics, securing a foothold in various Internet of Things end markets.

Within mobile, legacy solutions include discrete touch circuits that enable touch-based device interaction and user authentication, and display drivers to control LCD, and increasingly OLED, displays. As the mobile industry matures, component suppliers face heightening competitive pressures from industry consolidation, supplier price wars, and fast design refresh cycles. Over recent years Synaptics has worked to abate its mobile business' decline by building combined products, like touch and display driver integrated chips, or TDDI chips, which, while industry-unique, failed to gain traction in the saturated competitive landscape. Accordingly, we view the transition to an Internet of Things-focused portfolio as a smart, necessary move.

Business Strategy & Outlook

We do not believe Synaptics has an economic moat, as we think the company lacks maintainable competitive advantages in each of its three core markets: mobile, PC, and Internet of Things. Up until its most recent fiscal year, Synaptics derived most of its revenue from its mobile product application sales. Since the divestiture of the mobile LCD Touch and Display Integrated Circuit, or TDDI, business in early 2020, Synaptics has repositioned to predominantly operate in the Internet of Things space, rather than the mobile market. Although we view the firm’s investments in its consumer Internet of Things portfolio favorably, we don’t expect the firm to develop a moat in the segment because of its lack of differentiation, and the intense competition characteristic of the consumer Internet of Things space.

Synaptics is in an ongoing product mix shift, moving away from the mature mobile market, where design cycles are slowing and innovation quickly becomes commoditized, to concentrating on the fast-growing consumer Internet of Things market as a positive move for the company. We did not view Synaptics’ mobile business as moaty in years past, but we also don’t foresee Synaptics carving out a moat in consumer Internet of Things either. Product differentiation and customer retention have proven problematic in the mobile space and growth prospects are limited in the PC space. At the core of the transition from a mobile-driven business to a consumer Internet of Things -driven business lay the motivation of achieving best-in-class profitability. The margin-centric approach has informed the majority of the past years’ business decisions, particularly the divestiture of low-margin LCD TDDI assets and the acquisitions of Broadcom’s wireless Internet of Things connectivity assets, Marvell’s Multimedia Solutions Business, and Conexant Systems. As such, gross margins have improved from 29% in 2018, reflective of a commoditized mobile-heavy business, to 46% in 2021.

Synaptics’ Internet of Things business has expanded rapidly over the past four years, fueled by investments and growth in its core audio, video, and wireless capabilities. On the audio front, the core voice interface technology was acquired from Conexant in 2017, which includes far-field audio, active noise/echo cancellation, 3D sounds simulation, and smart voice-enabled devices. Despite dominant competitors such as Qualcomm and MediaTek having footholds in this smart audio space, Synaptics’ differentiation here is the design of purpose-built system on chips, or SoCs, for audio, rather than adapting mobile chips for these capabilities. On the video front, next-gen docking, video interface products, and video compression technology are core capabilities. We view the market opportunity for AI-enabled video capabilities as significant, with virtual video monitoring becoming increasingly relevant and sought-after technology. Nicely complementing the expanding product opportunity is the video compression technology stemming from the DisplayLink acquisition, which enables the wireless transmission of multimedia data. By leveraging this leading video compression technology, the DisplayLink business has expanded its use from traditional docking stations to new wireless applications such as wireless docking stations, wireless monitors, and video conferencing-like applications. Wireless connectivity capabilities initially came from the acquisition of the relevant assets from Broadcom, and with the soon-to-close acquisition of DSP Group, will be enhanced by ULE wireless solutions that enable a broad suite of home security solutions.

Although we view the transition to an Internet of Things -heavy business as a positive development for Synaptics, we expect the company to face many similar pressures in the consumer Internet of Things industry over time as were encountered in the mobile industry. Thus, we remain skeptical of Synaptics’ ability to carve out an economic moat once the transition to consumer Internet of Things is complete. We believe the consumer Internet of Things space will be characterized by intense competition and a deflationary pricing environment. 

Nonetheless, the consumer Internet of Things industry is still in the growth phase of its life cycle, and we expect Synaptics will be able to carve out small niches in the market by leveraging a deep and singular focus on AI-backed smart human-interface solutions. For example, Synaptics has expanding footholds in various wireless and video capabilities, such as set-top boxes, where we believe the application of Edge AI SoC technologies can allow Synaptics industry-unique capabilities. Big players in wireless, like Broadcom, Qualcomm, and NXP, choose not to focus their resources on some of the largely consumer-driven segments of this market, where margins are well-inferior to those achievable in industrial Internet of Things markets. In this way, we expect Synaptics will be able to target greenfield opportunities to secure incremental market shares in niche Internet of Things spaces.

Outside of consumer Internet of Things, Synaptics has products that address the automotive end market, Synaptics competed within two distinct verticals: discrete touch circuits and display drivers for infotainment screens. As competitors in these saturated markets solidified leadership positions ahead of Synaptics, specifically Cypress in touch circuits and FocalTech and Novatek in display drivers, Synaptics sought to find a unique market position through an integrated solution of touch and display. The resulting TDDI technology, which combines two discrete chips, a touch controller and a display driver, into a single piece of silicon, carved a market niche where Synaptics achieved consistent design wins, and now acts as the technological foundation for much of the forecast automotive business growth. We believe that Synaptics’ TDDI technology offers a point of differentiation from competitors, especially on the cost control side, and could be a catalyst to securing automobile touch-enabled display, as well as eventually mobile, design wins. On the mobile front, this opportunity in OLED TDDI has been coined as a longer-term play and we do not expect any significant contribution to Synaptics’ mobile business in the near term. On the automobile front, we believe the intense competitive environment in chip-enabled digitalization of cars prohibits a moat from forming around the TDDI technology, despite accelerating TDDI adoption in the industry. 

The mobile market, although maturing, continues to experience display technology innovation and proliferation of next-gen communication enablers such as 5G. We view Synaptics’ remaining mobile market opportunity to be centered on enabling advancement in mobile OLED displays. OLED displays are the future standard for all mobile devices, currently already strongly penetrating the high-end market, with accelerating industry adoption to what management expects to be one in four phones having flexible OLED by 2023. On the OLED touch technology side, the sole significant competitor is Samsung’s internal solution, as the underlying analog mixed-signal capability is difficult to replicate. On the OLED display driver side, several large players dominate the market, namely Samsung, LG, Japan Display, and Sharp. Recently, BOE, China’s largest display manufacturer, has made waves in the space as the company is being strongly considered as a display supplier to Apple and Samsung. As other display manufacturers, like BOE, start to gain share, the landscape appears to be opening, at least temporarily. 

Although Synaptics has actively capitalized on this opportunity, we expect the mobile OLED penetration to be limited as Synaptics will face an uphill battle attempting to gain maintainable market share from big-name incumbents. Further, the OLED display market has already reach commoditization, with a margin profile that is inherently dilutive. With Synaptics’ mobile business experiencing rapid decline over the past three years, shrinking as a percentage of total sales from 63% in 2018 to 30% in 2021, we view the opportunity in OLED technology--primarily in touch controllers--as the foundation for the long-term 25% business mix target. 

Trends in the mobile industry toward in-house development of touch, display, and fingerprint technology add to the competitive pressures for chip designers like Synaptics. In-house development of such technology allows for customization and optimization of the processors, with significant advantages for the smartphone makers in cost, software update optimization, and end-user experience. External supplier-designed chips require additional technological differentiation to be selected instead. As such, the most likely moat source that could arise in this mobile business is intangible assets, on the basis of chip design expertise and the resulting differentiated products that would enable Synaptics to command a premium over competitors’ solutions. As the mobile industry is highly commoditized and characterized by aggressive pricing wars among supplies, we find it unlikely that a moat will develop in this business. 

The mature PC industry, despite experiencing a spike in demand related to COVID-19-induced work- and learning-from-home, is likely to return to modest to no growth in the coming years, in our view. Looking ahead, opportunities in the PC space seem solid for Synaptics, particularly in docking stations and in-screen touch. Despite strength in the industry, additional PC product opportunities, and Synaptics’ new and growing presence in Chromebooks, we expect secularly constrained pricing power for component suppliers, long refresh/buying cycles, and a secular shift to mobile-based computing to limit growth opportunities in this market over the next decade.

None

Economic Moat

Synaptics

Synaptics, Inc. engages in the development, marketing, and sale of human interface semiconductor solutions for electronic devices and products. It specializes in custom-designed human interface that enable people to interact with mobile computing, communications, entertainment, and other electronic devices. The company was founded by Federico Faggin and Carver A. Mead in March 1986 and is headquartered in San Jose, CA.

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