Synopsis (NASDAQ:SNPS) is an electronic design automation (EDA) company that sells tools for testing advanced semiconductor chips. Their EDA suite covers the entire semiconductor development lifecycle, and you’d expect SNPS stock to do well in the AI era. It is the perfect “picks and shovels” play as companies are rushing to get ahead in the AI chips race.
And indeed, SNPS stock has done very well, just not recently.
SNPS stock is flat year-to-date, and it is down 13.2% in the past six months. The stock was even lower during peak (up until now) tariff pain in early April at around $380.9. It has since gained over $100, but many are split on where it could go next.
Synopsys has seen success with its AI chip design tools, and the company has continued to land more and more major clients with huge scaling potential.
Synopsys reported solid adoption metrics for their AI tools, as a U.S. memory company reported a 2x improvement in hardware utilization using VSO.ai, and an Asian hyperscale customer saw a 4x improvement in turnaround time for their HPC design.
The company also debuted AgentEngineer and Enhanced Hardware-Assisted Verification (HAV). AgentEngineer is supposed to change semiconductor chip design by automating tasks traditionally performed by humans and will initially focus on AI agents that receive directives from human engineers to handle chip design tasks like verifying circuit functionality. The latter provides verification, and big-name customers like Arm (NASDAQ:ARM) and Nvidia (NASDAQ:NVDA) are already using it.
Despite AI chip design tools seeing an increase in adoption, this hasn't translated into better stock performance, especially as the overall revenue of the company has actually declined by 3.7% year-over-year in Q1. Plus, Synopsys' fiscal 2025 revenue outlook of $6.745 billion to $6.805 billion fell notably short of analyst expectations of $6.9 billion.
Analysts don’t see this underperformance sticking around for the long term and expect 10.5% year-over-year sales growth, along with 13% EPS growth. Both EPS growth and revenue growth are expected to accelerate in 2026. The 3-year revenue growth rate is at 13.7%, and the 3-year EPS growth rate minus non-recurring items is at 24.5%.
The latter is expected to slow down, but the stock is still a steal at current prices.
The growth journey has been very smooth, and it also has $3.8 billion in cash against $665 million in debt. You are paying 35 times earnings after the most recent selloff, whereas investors have historically paid over 49 times earnings. But even if Wall Street holds up the current 35 times earnings premium and the company executes on EPS growth expectations, there’s decent upside here as the stock could touch $580 by the end of 2025.
So, is SNPS a buy? I believe yes. Still, it shouldn’t be that high up on your priority list since NVDA, AMD (NASDAQ:AMD), and others trade at bigger discounts with more upside potential. SNPS is only a good replacement if you want to buy into something less cyclical.
