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Synopsys Stock Falls on China Ban, But Long-Term Outlook Holds

[content-module:CompanyOverview|NASDAQ: SNPS]

July 3, 2020, Brazil. In this photo illustration the Synopsys logo seen displayed on a smartphone

Despite receiving only a fraction of the attention of AI-chip designers, Synopsys (NASDAQ: SNPS) is a company deeply important to the semiconductor industry. Synopsys’s electronic automation design (EDA) software is essential to developing these and many other chips, making it an important part of the industry to understand and potentially invest in.

However, Synopsys shares have seen disappointing performance recently. As of the June 11 close, they are down approximately 13% over the past 52 weeks. Recent news related to China and Trump isn’t helping. So, what are the recent developments surrounding Synopsys? Additionally, does this vital company still have the potential for significant long-term share price appreciation?

Synopsys Gets Whacked as Trump Shuts Down EDA Sales to China

On May 28, shares of Synopsys dropped nearly 10%. This was in reaction to news that the Trump administration ordered Synopsys and other EDA companies to halt sales to China. This would be far from a trivial loss of business for Synopsys. Around 10% of the company’s revenue came from China last quarter. The restriction underscores Synopsys’s importance in developing advanced chips. U.S. government officials see cutting China off from Synopsys’s software as a way to slow their development of this technology.

This was a dark cloud that hung over the company’s solid financial results, which came out the same day after the market's close. The company beat estimates on sales and adjusted earnings per share (EPS). The two figures grew by 10% and 22% from the previous year's quarter, respectively.

Synopsys said on the earnings call that it had not received a notification of this restriction from the administration. However, that notice came the next day. This led the company to suspend its fiscal Q3 and full-year 2025 guidance.

Although this restriction is certainly not good news for Synopsys, it also isn’t the backbreaker it may initially seem. The company’s revenue contribution from China declined from 15% in fiscal Q2 2024 to 10% last quarter. Now, the geography is the smallest contributor of the five it reports.

Trade restrictions involving China are not new to the company. Sales growth in the country has been decelerating for years. This is because past restrictions have shrunk the pool of Chinese customers it can sell to.

This shows that China was already a declining business for Synopsys, softening the blow of this new restriction. Another very important issue to address is the company’s planned acquisition of ANSYS (NASDAQ: ANSS).

ANSYS Deal Approval Gets a New Wrinkle

Synopsys first announced its deal to acquire ANSYS back in January 2024 for $35 billion. However, the company is still waiting for regulatory approval on the deal. Chinese regulators remain the only group that has yet to approve it. There has been some speculation that the deal could be approved sooner, as the company will no longer be doing business in China.

At the Bank of America Global Technology Conference 2025 on June 4, the company noted that some have implied the ANSYS deal could get done “this week." However, this would seemingly require the company to decide it no longer needs approval from China.

Synopsys pushed back on the idea that it would consider this. China-U.S. trade negotiations could progress in a way that restores Synopsys’s ability to sell in China. Moving forward with the acquisition without China's approval could greatly damage its chances of reentering the Chinese market.

So, Synopsys is still seeking the necessary approval from China. It is anticipated that this approval would come in the first half of 2025. With the new trade restrictions, there is a possibility that China’s stance on the deal will harden. It could try to use it as a bargaining chip in trade negotiations.

SNPS: Near-Term Uncertainty, But Secular Trends Are Too Big to Ignore

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Since Synopsys suspended its guidance, analysts at KeyCorp set a price target of $540 on the stock. This implies an 8% upside compared to the company’s June 11 closing price. This indicates a very moderate amount of upside potential, and the ANSYS deal provides a near-term headwind for Synopsys.

However, the company’s long-term prospects remain strong. The ANSYS deal will likely go through eventually, which will significantly aid the company’s competitive position.

Additionally, the company stands to benefit from a recovery in non-AI end markets that have experienced a decline for some time now.

More generally, the secular trend in developing more and more advanced chips across end markets sets the stock up for long-term success.

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