We are Synopsys, Inc. But are buy-rated. ,NASDAQ:SNPS) Our bullish thesis is because we believe that SNPS is well positioned in the electronic design automation (EDA) industry. SNPS provides software, hardware equipment and services aimed at one goal: the design and manufacture of advanced semiconductors. We like SNPS because This enables technological advances in semiconductors. According to IDC, the semiconductor industry is projected to grow a CAGR of 13.7%, The demand for chip design is constant as companies always need better ways to optimize chip performance and develop new applications that are hardware accelerated. For example, companies around the world are trying to develop chips for specific use cases – AI, security, encryption, etc.
While SNPS is not cheap, we believe its business is remarkably resilient, even during recessions. Hence, we advise investors to buy the shares on any weakness.
The EDA industry is remarkably resilient to SNPS benefits
SNPS is primarily an EDA company. Today’s semiconductors consist of many chips and billions of transistors packaged in ultra-small forms. For us to get the end-user experience that we pay for, semiconductor companies must ensure that chips and transistors work flawlessly, and that’s where SNPS’ hardware and software support comes in. . About 59% of SNPS’s revenue comes from its work in the EDA industry. The following company earnings graph outlines SNPS revenue by product.
We are optimistic about SNPS due to the important role the company plays in the EDA industry. EDA industry is projected to grow 9.6% CAGR till 2027. We are confident that the EDA growth in the stock of SNPS will reflect positively.
Expanding the customer base means revenue growth.
We believe SNPS will continue to grow as it meets demand for chip designs that remain stable even during market contractions. SNPS provides the chip design and validation services needed to successfully design chips for everything from cars to artificial intelligence (AI). The need for more complex electronic designs is increasing due to the development of high-impact markets including AI, industrial, automotive and consumer electronics. SNPS gives customers a design edge over their competition – the following chart of SNPS market segments.
Despite current chip shortage issues, the customer base for chip design services is expanding. In previous years, the main customers of SNPS were traditional semiconductor companies, but the company’s customer base is expanding. Software and other companies that once outsourced chip design are moving to designing their chips in-house. Tech giants like Apple (AAPL), Amazon (AMZN), and Tesla (TSLA) are running to develop their own chips, SNPS shares the demand for chip design products with its largest competitor, CDNS. We are not concerned about the competition of CDNS with SNPS as the two companies together dominate the chip design market. Demand from non-traditional chip companies will drive growth for SNPS and CDNS for the next several years, leading to a buy in the stock.
SNPS has grown at a remarkable 380% rate in the last five years. The stock has appreciated about 162% since the start of the pandemic. SNPS grew 28 per cent even on the one-year metric. YTD, the stock is up about 1%. We believe SNPS will continue to grow as it meets demand for chip designs that remain relatively stable even during market downturns.
The following graph shows the stock performance of SNPS over the last five years.
SNPS is trading around $372 and not very cheap. The stock is cheaper than its peer group as it is trading at a P/E of approximately 38x C2023 EPS compared to 76.3x the peer group average of $9.85. The stock is trading at 9.7x the EV/C2023 sell-off compared to an average of 6.3x. We believe the stock is a good choice for turbulent times and SNPS within EDA are optimistic about the future. The following chart shows semiconductor peer group valuation.
words on wall street
The Wall Street consensus on SNPS is a buy. Eleven out of twelve analysts are buy-rated, and the remainder are hold-rated. SNPS is trading at $380. The average price target is $380, and the average price target is $381, with a potential 2% upside. But we expect many Wall Street analysts to raise their price targets over the next few weeks, pushing the stock higher. The following chart shows the sell-side rating and price target of SNPS.
What to do with stock:
We believe SNPS is a buy because of its central role in chip design. We expect SNPS stock to appreciate regardless of what the semiconductor market is like, given that companies continually invest in designing new chips to stay competitive. More importantly, many companies such as Apple and Amazon, which previously purchased chips off-the-shelf, are now designing custom chips for their products, increasing the 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 can potentially mitigate the semiconductor slowdown. We believe that the prospects of SNPS are favorable and investors should buy shares here.