Major semiconductor design software company synopsis (NASDAQ:SNPS) I’m having a little time. Over the past three years, the company has catapulted from relative obscurity to prominence, and for good reason.
According to new CEO Sassine Ghazi, Synopsys “achieved a CAGR of 17%” [compound average growth rate], Non-GAAP [generally accepted accounting principles] Operating profit margin improved by 7 points, Non-GAAP EPS [earnings per share] CAGR is 26%. ” For a major software company, that’s impressive growth, especially considering the bear market included.
But is its financial performance enough to justify an 80% return from early 2023? Maybe.
But the more important question is what happens next. Nvidia Although it gets the most attention in the current AI hype, Synopsys has a big role to play as well. Will Synopsys be able to grow parabolically like Nvidia stock?
Is Synopsys ready to make a grand move?
Synopsys’ most recent quarterly results were very strong. Revenues increased 21% year over year to $1.65 billion, and adjusted EPS increased 36% year over year. Management has raised its full-year forecast for adjusted EPS and now expects it to increase 21% from 2023.
But what’s getting everyone’s attention is the pending merger between Synopsys and the design simulation software provider. ansis (NASDAQ:ANSS). Although officially announced in late January, the deal is not likely to close until sometime in 2025, pending regulatory approval.
Despite this, significant movement is occurring in this market.Synopsys is trying to buy Ansys Complex AI systems are increasing challenges for customers — From data center operators to car manufacturers to smartphone developers.Synopsys peers cadence design system recently announced a proprietary AI-powered supercomputing platform to enhance customers’ simulation capabilities in design workflows.and keysight technology also secretly made small acquisitions to increase its capabilities in the same sector.
First of all, what is so important about simulation software? Mr. Ghazi commented as follows at the financial results conference.
There’s no one better able to help companies innovate in this age of intelligence. Semiconductor companies are now designing with a systems approach in mind, and systems companies are unlocking added value through specialized chips and software-defined systems. At the same time, customers believe that combining electronics design and physical simulation is critical to delivering high-performance, high-profit solutions to their businesses.
Combining Synopsys and Ansys will create new market opportunities for the combined business, especially as design tasks become more complex due to the proliferation of AI. Ansys already derives the majority of its revenue from non-technical customers in industrial markets, so Synopsys could offer its design software to companies that need the help of AI most. If successful, this could help blur the line between today’s computing intelligence and the (currently) very different world of mechanical engineering.
But why compare Synopsys-plus-Ansys to Nvidia? In 2019, I wrote extensively about the undervalued pending acquisition the AI giant was looking to make, network chip design company Mellanox. Ta. When Nvidia finally closed the deal in early 2020, the pandemic was occurring and few investors were paying attention to the new AI training possibilities Nvidia was considering.
But Mellanox ultimately became a pivotal part of Nvidia’s current AI dominance, as it helped the company solve problems in moving large amounts of data quickly during the AI training process.
Is Synopsys trying to solve a similar AI problem (enabling AI in everyday applications for the masses) by acquiring Ansys? That’s probably the case, and we can expect big returns in the coming years.
The stock is priced at a premium, but is there a good reason for it?
This may all sound good, but there’s a problem with valuation. Synopsys stock is priced at a high premium of 63 times trailing 12-month EPS and 67 times trailing 12-month free cash flow (which more closely matches adjusted EPS). Based on forward-looking statements, Synopsys trades at about 42 times forward EPS, which certainly still represents a high price tag.
Nvidia trades at a similarly high valuation, and has remained so for years. Top AI stocks seem destined to become “overvalued.” After all, new AI is still in its early stages of development and has the potential to deliver significant new efficiencies in business operations.
Be wary of this premium, but don’t ignore Synopsys stock either. With or without Ansys, Ansys has an important place in the semiconductor industry and overall AI development. The acquisition of Ansys could go down in history as a huge deal. Consider building a position in Synopsys over time using dollar-cost averaging to smooth out inevitable stock price fluctuations.
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nick rossolillo and his client He has positions at Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool has positions in and recommends Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool recommends his Ansys. The Motley Fool has Disclosure policy.
Up 80% since 2023, is this stock poised to repeat Nvidia’s record performance? Originally published by The Motley Fool
