Is Synaptics Part of the Overvalued Tech Bubble?

Synaptics SYNA is a developer of interactive solutions in the personal computing and telecommunications industries. Basically, Synaptics produces a lot of the laptop trackpads and other communicative interfaces used in many electronic devices today. While it is a frontrunner in its niche industry, is Synaptics dangerously expensive?

Synaptics is currently trading at its highest levels since the summer of 2010. On Thursday, October 20, Synaptics reported EPS of $0.57 versus an estimate of $0.47 along with revenues of $133.4 million versus an estimate of $132.62 million. The large pop up in the stock price is directly related to the earnings report. One of the things you need to consider, however, is that the greater economic conditions are extremely fragile. Day in and day out, uncertain news regarding Greek debt is released, and an actual meltdown would occur in depressed equity prices, no matter how impressive a company's business model is.

Synaptics also operates in a fairly diluted industry. Thousands of small companies exist that work on extremely similar processes as Synaptics. While it has a strong presence in the industry, the barrier to entry is very low. Moreover, the bargaining power of its buyers and suppliers are strong. With many other competitors, Synaptics' clients have the ability to refer to them for future business; Synaptics' suppliers can also flex their power and make prices higher if they desire.

Technology is also one of the few industries that people are suspecting to be in a bubble. The internet is the primary culprit of this suspicion, but in the event websites like LinkedIn LNKD and Pandora P turn out to be failures, the rest of the technology industry will go down with it. Companies that operate in the technology and industrials sectors, like Lockheed Martin LMT will not suffer as much, but companies that are directly related to computing, like Synaptics, will be. In the event this happens, the subsequent dip in Synaptics' stock price would be a good buying opportunity.

Apart from qualitative factors, Synaptics is now trading at a higher price/earnings ratio than its direct competitors. Currently, it is trading at 15 times earnings while its competitors are trading at 12.7 times earnings, on average. Moreover, Synaptics' margins are declining on a year-over-year basis. Its operating margin is 12.1% while competitors' operating margins are about 15% on average; likewise, net margins are about 10.7% while competitors' net margins are about 12.9% on average.

On a brighter note, Synaptics has been able to progressively increase its cash reserves and net income figures. Its has also been able to increase asset turnover, which counteracts the contracting margins. It has also been able to progressively decrease its debt load, which is always a good thing to see. Lastly, its retained earnings has been increasing over time, which always benefits shareholders.

Synaptics is a niche technology company, and has various positive and negative aspects. Investors need to determine if macroeconomic trends outweigh company specific aspects. In the long run, Synaptics may be able to thrive as a result of a growing computing and telecommunications industries, but if they are truly in a bubble, Synaptics could suffer along with the rest.