Artificial intelligence (AI) is permeating every industry, including semiconductors, due to its ability to expedite processes, enhance decision-making, reduce human error, and handle repetitive tasks efficiently. With the growing complexity of chip design and the demand for rapid market deployment, innovative solutions are needed to meet the needs of advanced technologies like next-generation data centers, medical devices, and smartphones.
AI adoption in the semiconductor sector was initially slow, particularly in Electronic Design Automation (EDA) tools. Synopsys, Inc. (SNPS), a leading EDA firm, recognized this opportunity to leverage AI for chip design. The company introduced DSO.ai, the first AI-driven reinforcement learning technology, which has significantly improved productivity and performance in chip design while offering cloud scalability.
The chip development process involves multiple steps, and integrating AI-driven solutions tightly yields better outcomes. Using Synopsys' AI technology, customers have reported productivity increases exceeding threefold and up to 20% better quality results, all while reducing resource usage.
Last month, the company announced the certification of its AI-driven digital and analog design flows on Samsung Foundry's SF2 process, achieving multiple test chip tapeouts. This collaboration, powered by the Synopsys.ai full-stack EDA suite, enhances PPA, boosts productivity, and accelerates analog design migration for Samsung's latest Gate-All-Around (GAA) process technologies. This collaboration has produced significant advancements 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 AI workloads' high bandwidth and low latency requirements, supporting data transfers up to 512 GB/s bidirectional in an x16 configuration. This capability is crucial for managing the massive computational demands of large language models in data centers.
Shares of SNPS have gained 16.7% over the past nine months and 23.1% over the past year to close the last trading session at $563.1. However, it has plunged 9.2% over the past month.
Here are the financial aspects of SNPS that could influence its performance in the near term:
Strong Financials
For the fiscal second quarter that ended April 30, 2024, SNPS’ total revenue increased 15.2% year-over-year to $1.45 billion. Its operating income rose 13.6% from the year-ago value to $332.07 million.
In addition, non-GAAP net income and non-GAAP net income per share from continuing operations attributed to SNPS grew 26.8% and 26.1% from the prior year’s period to $466.94 million and $3, respectively. As of April 30, 2024, its 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. Likewise, the consensus EPS estimate of $3.28 for the current quarter exhibits a 13.8% rise from the previous year. Furthermore, the company topped the consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.
For the fiscal year ending October 2024, Street expects SNPS’ revenue and EPS to grow 5.3% and 16.1% from the prior year to $6.15 billion and $13, 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. Likewise, the stock’s forward EV/EBITDA multiple of 33.24 is 124.2% higher than the industry average of 14.82x.
ROKU’s forward EV/Sales and Price/Sales ratios of 13.87x and 14.03x are considerably above their respective industry averages of 2.98x and 2.97x. Moreover, its forward Price/Cash Flow multiple of 42.50 is 77.2% higher than the industry average of 23.98x.
Robust Profitability
SNPS’ trailing-12-month gross profit margin of 80.39% is 64.1% higher than the industry average of 49%. Its trailing-12-month EBITDA margin of 25.72% is 154.9% higher than the 10.09% industry average. Also, the stock’s net income margin of 22.60% compares to the 2.99% industry average.
Additionally, SNPS’ trailing-12-month ROCE, ROTC, and ROTA of 21.89%, 12.58%, and 12.96% favorably compare to the industry averages of 4.36%, 2.93%, and 1.77%, respectively. Furthermore, the company’s trailing-12-month EBIT margin of 22.96% is 352.2% higher than the industry average of 5.08%.
POWR Ratings Exhibit Mixed Prospects
SNPS’ 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. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an 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 its higher-than-industry profitability.
However, with a 24-month beta of 1.49, the stock has earned a grade of C for Stability. The stock’s C grade for Momentum is justified by its share price, which is currently trading below its 50-day moving average of $586.36 but above the 200-day moving average of $546.88.
SNPS is ranked #70 in the 136-stock Software - Application industry. Click here to access SNPS’ Growth, Value, and Sentiment ratings.
Bottom Line
With AI becoming integral to chip design and Synopsys leading the charge, the company is well-positioned to capitalize on the growing demand for AI-powered solutions. The company's innovative solutions, like DSO.ai, have significantly enhanced productivity and performance, promising robust growth prospects. However, with SNPS’ elevated valuation and enhanced volatility, potential investors might consider waiting for a more opportune entry point into this stock.
How Does Synopsys, Inc. (SNPS) Stack Up Against Its Peers?
While SNPS has an overall grade of C, equating to a Neutral rating, you may also check out these other A-rated (Strong Buy) stocks within the Software – Application industry: Yalla Group Limited (YALA), IBEX Limited (IBEX) and Cognyte Software Ltd. (CGNT). To explore more A-rated Software - Application stocks, click here.
What To Do Next?
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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%, versus a 16.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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