Is Now the Time to Invest in Synopsys as Demand for AI Chips Soars?

Artificial intelligence (AI) is permeating every industry, including semiconductors, due to its ability to speed up processes, improve decision-making, reduce human error, and efficiently handle repetitive tasks. As the complexity of integrated circuit design increases and the demand for rapid market deployment increases, innovative solutions are needed to meet the needs of advanced technologies such as next-generation data centers, medical devices, and smartphones.

The initial adoption of AI in the semiconductor sector was slow, particularly in Electronic Design Automation (EDA) tools. Synopsys, Inc. SNPSleading EDA company, recognized this opportunity to leverage AI for IC design. The company introduced DSO.ai, the first AI-based reinforcement learning technology that significantly improved IC design productivity and efficiency while offering scalability in the cloud.

The chip development process involves multiple stages, and tight integration of AI-based solutions yields better results. Using Synopsys AI technologies, customers have reported productivity increases of more than three times and up to 20% better quality of results, all while reducing resource utilization.

Last month, the company announced the certification of its AI-driven digital and analog design flows on Samsung Foundry’s SF2 process, which has led to multiple chip test tapes. This collaboration, powered by Synopsys.ai full-stack EDA suite, strengthens PPA, increases productivity and accelerates the migration of analog designs to Samsung’s latest Gate-All-Around (GAA) process technologies. This collaboration has delivered significant progress and will continue to optimize Samsung’s advanced SF1.4 process.

On June 10, SNPS unveiled the industry’s first complete PCIe 7.0 IP solution, which includes a controller, IDE security module, PHY, and verification IP. This solution addresses the high-bandwidth, low-latency requirements of AI workloads, supporting data transfers of up to 512 GB/s bidirectional in an x16 configuration. This capability is essential for managing the massive compute requirements of large language models in data centers.

SNPS shares have gained 16.7% over the past nine months and 23.1% over the past year, closing at $563.1 in the last trading session. However, they have fallen 9.2% over the past month.

Here are the financial aspects of SNPS that could impact its results in the short term:

Strong finances

For the fiscal second quarter ended April 30, 2024, SNPS’s total revenue increased 15.2% year over year to $1.45 billion. Operating income increased 13.6% year over year to $332.07 million.

Additionally, non-GAAP net income and non-GAAP net income per share from continuing operations attributable to SNPS increased 26.8% and 26.1% compared to the prior-year period to $466.94 million and $3 million, respectively. As of April 30, 2024, cash and cash equivalents increased to $1.50 billion from $1.43 billion recorded on October 31, 2023.

Positive analyst estimates

The consensus revenue estimate of $1.52 billion for the fiscal third quarter ending July 2024 reflects a 2.1% year-over-year improvement. Similarly, the consensus EPS estimate of $3.28 for the current quarter shows a 13.8% increase from the prior year. Furthermore, the company has topped the consensus revenue and EPS estimates in three of the last four quarters, which is impressive.

For the fiscal year ending October 2024, the Street expects SNPS’s revenue and earnings per share to increase 5.3% and 16.1% from the prior year to $6.15 billion and $13 billion, respectively.

Stretched valuation

In terms of forward non-GAAP P/E, SNPS is trading at 43.33x, which is 79.1% higher than the industry average of 24.19x. Similarly, the stock’s forward EV/EBITDA of 33.24 is 124.2% higher than the industry average of 14.82x.

ROKU’s forward EV/Sales and Price/Sales multiples of 13.87x and 14.03x are well above their industry averages of 2.98x and 2.97x. Furthermore, its projected Price/Cash Flow multiple of 42.50 is 77.2% higher than the industry average of 23.98x.

Solid profitability

SNPS’s gross profit margin for the last 12 months at 80.39% is 64.1% higher than the industry average of 49%. Its EBITDA margin for the last 12 months at 25.72% is 154.9% higher than the industry average of 10.09%. Furthermore, its net income margin per share at 22.60% is comparable to the industry average of 2.99%.

Additionally, SNPS’s ROCE, ROTC and ROTA for the last 12 months of 21.89%, 12.58% and 12.96%, respectively, compare favorably to the industry averages of 4.36%, 2.93% and 1.77%, respectively. Furthermore, the company’s EBIT margin for the last 12 months of 22.96% is 352.2% higher than the industry average of 5.08%.

POWR Ratings Show Mixed Outlook

SNPS’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. POWR Ratings are calculated by considering 118 different factors, with each factor weighted to the optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SNPS has a B grade for quality, which is justified by higher-than-industry profitability.

However, with a 24-month beta of 1.49, the stock has been given a grade of C for Stability. The stock’s C grade for Momentum is justified by the stock’s price, which is currently below its 50-day moving average of $586.36 but above its 200-day moving average of $546.88.

SNPS is ranked #70 in the Software & Applications industry out of 136 companies. Click here to access SNPS Growth, Value, and Sentiment Scores.

Summary

As AI becomes an integral part of IC design, and Synopsys is leading the way, the company is well-positioned to capitalize on the growing demand for AI-based solutions. The company’s innovative solutions, such as DSO.ai, have significantly increased productivity and efficiency, promising solid growth prospects. However, given SNPS’s elevated valuation and increased volatility, prospective investors may want to wait for a more favorable entry point into the stock.

How does Synopsys, Inc. (SNPS) compare to other companies?

While SNPS has an overall rating of C, which equates to a Neutral rating, you may also want to check out these other A-rated (Strong Buy) stocks in the Software & Applications industry: Yalla Group Limited YALAIBEX Limited IBEX and Cognyte Software Ltd. CGNTFor more A-rated Software & Apps stocks, click here.

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SNPS shares closed at $563.12 on Friday, up $2.74 (+0.49%). Year to date, SNPS has gained 9.36%, compared with a 16.23% gain for the benchmark S&P 500 during the same period.