Analysts still see a long-term upside – Magic Post

Today’s summary

$505.32 -3.17 (-0.62%)

(As of 10/12/2024 ET)

52 week range

$457.52

▼

$629.38

P/E ratio

34.80

Price target

$649.00

Undoubtedly, one of the most important companies in the world of semiconductors is Synopsys NASDAQ:SNBS. The company has established an established position as one of the leading providers of semiconductor design software. However, the technology company’s stock price remains stagnant in 2024, offering a total return of -1% as of the December 9 close. One major contributor is the roughly 14% decline in value the company has seen since the market closed on December 4.

Is now the ideal time to invest in Synopsys as it strives to improve its performance in 2025? It’s a fair question, especially in light of recent shifts in price targets on Wall Street. Let’s take a quick look at the company’s background, its role in the industry, and whether Synopsys is poised for a turnaround.

Summary: A major player in the chip market

The summary is Number one provider Electronic Design Automation (EDA) software in semiconductor industry. Without the latest EDA software, it is impossible to design the world’s most advanced chips. Chip designers can use older versions of the software to design less advanced chips, which is why Chinese chips are less advanced than American chips. The US government imposed restrictions on the sale of advanced chip development software to Chinese companies.

Wall Street generally raises expectations despite stock prices falling by double digits

Synopsys’ slight earnings beat in 2024 has left the market tepid. The company posted a slight profit in the fourth quarter, but it was the full-year 2025 guidance that dragged the stock down. The company’s sales forecast was 1% lower than Wall Street expectations. Increased trade restrictions imposed on China, as Synopsys achieved 15% of its revenues in 2023, Contribute to this. However, adjusted earnings fell solidly within the expected range. The extent to which Synopsys sees the second half of 2025 as better than the first half is also at odds with Wall Street views.

Oddly enough, after the earnings announcement, some Wall Street analysts raised their price targets. Others reduced it or repeated it. Overall, of the six analysts who issued an update, the average price target rose slightly. This is very different from the roughly 14% decline in the share price since the release. The average of these six target prices implies a 28% upside in the stock price.

Short and long term condition of Synopsys

Synopsys remains essential to the future of the semiconductor market. Chip design companies continue the innovation race to stay ahead or catch up with their competitors. This applies to chips used in cloud AI workloads and to AI accelerator chips in endpoint devices. Synopsys’ software is important to each of these markets, as well as the automotive and industrial markets. Synopsys continually invests to stay at the forefront of all markets it can serve. Its R&D spending as a share of revenue has exceeded 30% every quarter for the past 10 years. The percentage in the last quarter was 34%.

The company’s dedication to investment is further demonstrated by its $35 billion acquisition of ANSYS. It hopes to close this deal in the first half of 2025. The purpose of the acquisition is to better optimize all components of the data center beyond just silicon on an advanced chip. Businesses need to optimize data center networking, storage, and cooling to get the best performance at the best price.

The acquisition of ANSYS aims to increase Synopsys’ capabilities in this type of optimization, which improves all components in the system and extends to other areas such as vehicles and robotics. The company’s established position at the beginning of the semiconductor and electronics value chain provides it with strong long-term headwinds to capitalize on technological innovation.

The recent decline in Synopsys’ stock price looks like a strong opportunity to cautiously capitalize on this long-term outlook. The word used is “cautiously” because Synopsys is still not a cheap stock by any means. The price-to-earnings (P/E) ratio of 34x is high compared to… No. 23x the S&P 500. However, the forward P/E looks more favorable when compared to Synopsys’ average level over the past three years, which is 38 times. How Synopsys handles the increasing difficulty of doing business in China and the development of the ANSYS acquisition are key factors to watch.

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