The NASDAQ’s recent decline after a strong showing at the start of 2021 shows some investors were waiting to sell pricey tech stocks and get their profits at the first signal of a shift. But that has not happened to Synaptics (SYNA).

Shares of the human-interface company have more than doubled this past year, and now they’re up 42%. 

In recent weeks the stock as taken off even as the overall market stumbled. Let’s analyze the reasons why and decide whether Synaptics has room to go higher.

The biggest reason behind Synaptics’ surge is its transformation toward a high margin model. It had a 52.1% non-GAAP gross margin for its second quarter last year. That was the greatest adjusted gross margin level in the firm’s existence and a large increase over its previous 42.9% number.

Synaptics produces an assortment of tech hardware and software. But its margin gains are the result of a change in the product lineup that was done three years back.

The numbers show it is on the right track to give more margin gains. The company expects non-GAAP gross margin to be 52.5% for this quarter, which is a pretty big increase over last year’s 44.1%. 

Not surprisingly, its earnings are anticipated to go higher in the approaching years, rising greatly over fiscal 2020’s adjusted earnings of $5.95 a share.

What’s fueling the company’s success?

The Internet of Things (IoT) industry is playing a huge role in boosting Synaptics’ numbers. The company sees this segment producing 43% of its overall revenue in Q3 of fiscal 2021, which would be almost twice the previous-year period’s number of 22%. The IoT business reported 74% year-over-year revenue growth in the previous quarter as new sales increased.

Synaptics expects this IoT money flow to keep its great pace of growth and give higher profits. Management stated on their recent earnings call they expect “the overall market for IoT to continue to grow at a 10% to 15% CAGR for the next three years.” 

And the company also says its revenue run rate from “smart displays, home automation, thermostats, smartwatches, home surveillance, drones, and streaming devices” can 2x within the next year and continue to grow in the long run.

This impressive momentum should keep strong revenue and earnings growth going into the foreseeable future. Which is why investors looking for a tech stock to add to their portfolios should consider Synaptics.

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