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Semiconductor Giant Synopsys Slides 14% — Time to Take Notice

By: MarketBeat

December 10, 2024 at 09:59 AM EST

ⓘ This article is third-party content and does not represent the views of this site. We make no guarantees regarding its accuracy or completeness.

In this photo illustration,The logo of Synopsys company,is displayed on a smartphone.indonesia - June 16th 2024. - Stock Editorial Photography

Indisputably, one of the most important companies in the world of semiconductors is Synopsys (NASDAQ: SNPS). The company has established an ironclad position as one of the key providers of semiconductor design software. However, the technology company’s share price has stagnated in 2024, providing a total return of -1% as of the Dec. 9 close. A significant contributor is the nearly 14% drop in value the firm has experienced since the Dec. 4 market close.

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

Synopsys: A Foundational Player in the Chip Market

Synopsys is the number one provider of electronic design automation (EDA) software in the 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 China’s chips are less advanced than the United States'. The U.S. government has limited the sale of advanced chip development software to Chinese firms.

Wall Street Raises Expectations Overall Despite Double-Digit Share Price Drop

Synopsys's slight earnings beats in 2024 have left the market lukewarm. The company beat slightly on its Q4 earnings, but it was the full-year 2025 guidance that sent shares tumbling. The company’s sales projection was 1% lower than Wall Street expected. Increased trade restrictions placed on China, where Synopsys generated 15% of its revenue in 2023, contributed to this. However, adjusted earnings did fall solidly within the expected range. The extent to which Synopsys sees the second half of 2025 as being better than the first half also clashed with Wall Street views.

Curiously, after the earnings release, some Wall Street analysts raised their price targets. Others lowered or reiterated them. Overall, of six analysts who issued an update, their average price target actually slightly increased. That’s vastly different from the nearly 14% decline in share price seen since the release. The average of these six price targets implies a 28% upside in the share price.

Short and Long-Term Case for Synopsys

Synopsys remains essential to the future of the semiconductor market. Chip design companies continue to be in the race of innovation to stay ahead or catch up with their competitors. That is true for chips used in cloud AI workloads and for AI accelerator chips in endpoint devices. Synopsys’s software is important to both these markets, as well as the auto and industrial markets. Synopsys continually invests to stay at the forefront of all markets it can serve. Its research and development spending as a percentage of revenues has been above 30% every quarter for the past ten years. Last quarter, the figure was 34%.

The company’s dedication to investment is further demonstrated through 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 a data center beyond simply silicon on an advanced chip. Companies need to optimize networking, storage, and cooling in a data center to create the best performance for the best price.

The ANSYS acquisition aims to increase Synopsys's capabilities in this optimization type, which optimizes all components in a system and extends to other areas like vehicles and robots. The company’s foundational place at the beginning of the semiconductor and electronics value chain provides it with strong long-term tailwinds to take advantage of technological innovation.

The recent drop in Synopsys’s stock price looks like a solid opportunity to cautiously take advantage of this long-term outlook. The operative word is "cautiously," as Synopsys is still by no means a cheap stock. The 34x forward price-to-earnings (P/E) ratio is high compared to the 23x figure of the S&P 500. However, the forward P/E looks more favorable when compared to Synopsys’s average level over the past three years, which is 38x. How Synopsys navigates the increasing difficulty of doing business in China and the progression of the ANSYS acquisition are key factors to watch.

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