Synopsis: Provides good shelter during market downturns (NASDAQ: SNPS)

Synopsys World Headquarters, Mountain View, CA

jejim

We have a purchase rating on Synopsys, Inc. (NASDAQ: SNPS). Our bullish contention is because we believe SNPS is well positioned in the Electronic Design Automation (EDA) sector. SNPS provides software, hardware tools and services aimed at one goal: the design and manufacture of advanced semiconductors. We like SNPS because enables technological advances in semiconductors. According to IDC, the semiconductor industry is expected to grow to CAGR of 13.7%. The demand for chip designs is constant as companies always need better ways to optimize chip performance and develop new hardware-accelerated applications. For example, companies around the world are looking to develop chips for specific use cases: artificial intelligence, security, cryptography, etc.

While SNPS isn’t cheap, we believe its business is remarkably resilient even during downturns. Therefore, we advise investors to buy stocks on any weak spot.

The EDA industry is remarkably resilient to the benefit of SNPS

SNPS is primarily an EDA company. Semiconductors today are made up of multiple chips and billions of transistors packed into ultra-small shapes. To get the end user experience we pay for, semiconductor companies need to ensure that chips and transistors are working flawlessly, and this is where SNPS’s hardware and software support comes into play. About 59% of SNPS’s revenue comes from its work in the EDA sector. The company’s earnings chart below outlines SNPS’s revenue by product.

Revenue segments

SNPS

We are optimistic about SNPS due to the pivotal role the company plays in the EDA industry. The EDA sector is expected to grow at 9.6% CAGR by 2027. We believe EDA growth will be positively reflected in SNPS shares.

Expanding the customer base means increasing revenues.

We believe SNPS will continue to grow as it fuels demand for chip design which is constant even during a market downturn. SNPS provides chip design and verification services companies need to successfully design chips for everything from cars to artificial intelligence (AI). The need for more complex electronic projects is increasing due to the growth of high impact markets, including artificial intelligence, industrial, automotive and consumer electronics. SNPS gives customers a design advantage over the competition: the following chart of SNPS market segments.

Vertical synopsis of destination

SNPS

Despite the current chip shortage problems, the customer base for chip design services is expanding. In previous years, SNPS’s main customers were traditional semiconductor companies, but the company’s customer base is expanding. Software and other companies that once outsourced chip design are moving towards internal chip design. Tech giants like Apple (AAPL), Amazon (AMZN) and Tesla (TSLA) are rushing to develop their own chips. SNPS shares the demand for chip design products with its biggest competitor, CDNS. We are not worried about the competition from CDNS with SNPS because the two companies together dominate the chip design market. Demand from non-traditional chip companies will drive SNPS and CDNS growth over the next few years, making the stock a buy.

Stock performance

SNPS has grown by a remarkable 380% over the past five years. The stock has appreciated by around 162% since the start of the pandemic. Even on the one-year metric, SNPS grew by 28%. Since the beginning of the year, the stock has risen by around 1%. We believe SNPS will continue to grow because it fuels demand for chip design which is relatively constant even during downtrend in the market.

The graphs below show the performance of SNPS’s stock over the past five years.

Stock performance over the past five years

Ycharts

Stock trend compared to the cadence since the beginning of the pandemic

Ycharts

Assessment

SNPS is trading around $ 372 and is not overly cheap. The stock is cheap relative to its peer group as it trades at a P / E of around 38x C2023 EPS of $ 9.85 compared to a peer group average of 76.3x. The stock is trading 9.7 times EV / C2023 sales compared to an average of 6.3 times. We believe the stock is a good choice for turbulent times and are optimistic about SNPS’s future within the EDA. The chart below illustrates the peer group assessment of semiconductors.

Peer group assessment

Refinitive

Word on Wall Street

Wall Street’s consensus on SNPS is a buy-in. Eleven of the twelve analysts have a buy rating and the rest have a hold rating. SNPS is trading at $ 380. The median price target is $ 380 and the median price target is $ 381, with a potential upside of 2%. But we expect many Wall Street analysts to raise their price targets in the coming weeks, driving the stock higher. The chart below shows the SNPS sales side assessments and price targets.

Evaluations on the sales side and price targets

Refinitive

What to do with the title:

We believe SNPS is a purchase due to its central role in chip design. We expect SNPS shares to appreciate regardless of how the semiconductor market moves as companies constantly invest in the design of new chips to keep up with the competition. More importantly, many companies like Apple and Amazon, which previously bought standard chips, are now designing custom chips for their products, driving demand for SNPS products. SNPS gives semiconductor companies the competitive edge they need to survive in the industry. We believe SNPS’s EDA business and new chip designs could potentially alleviate the semiconductor slowdown. We believe the outlook for SNPS is favorable and investors should buy shares here.

Leave a Reply

%d bloggers like this: