Synopsys Stock To Grow 20%?

by Trefis Team
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[Updated 04/06/2021] Synopsys Update

After growing 190% since the end of FY2018 (ended October 2018), Synopsys’ stock (NASDAQ: SNPS) still has upside potential of nearly 20% as per consensus estimates. Synopsys, a company that focuses on silicon design and verification, silicon intellectual property, and software security and quality saw its stock grow by 190% from $90 at the end of FY 2018 to near $260 now, compared to the S&P 500 which gained 53% since the end of FY2018. The company has seen revenue and earnings rising over recent years, while its P/E multiple has also risen. Our dashboard Buy or Sell Synopsys Stock has the underlying numbers.

Despite the Covid-19 crisis, SNPS saw its revenue rise in Q1 2021 (ended Feb 2020) by 16% to $970 million as companies across vertical segments are racing to leverage big data, faster computation, and machine learning to differentiate themselves. Net income rose to $1.03 per share compared to $0.67 in the same period of the previous year. Further, the company reported $174 million of cash inflows from operating activities for the first quarter.

The coronavirus cases are rising again across regions which could continue to drive companies toward digital transformation and technology. This move toward advanced technology would continue to benefit companies like Synopsys which help their customers innovate from silicon to software. As per consensus estimates the company’s revenues are expected to grow by nearly 10% and market price by 20%. 

[Updated 10/02/2020]  Synopsys’ Stock has Rallied 90%, Should You Enter?

We believe there may be better places for your money than Synopsys’ stock (NASDAQ: SNPS). SNPS trades at $214 currently and it has gained 53% in value so far this year. It traded at a pre-Covid high of $165 in February, and it is much above that level now. Also, SNPS stock has gained 97% from the low of $108 seen in March 2020, as they saw a boost in the demand for advanced chips due to work from home orders globally. The company saw a revenue growth of 13% in Q3 2020 (ended July 2020) while Net Income more than doubled for the quarter primarily due to better Operating margin and benefit in income tax. In view of the strong rally in SNPS stock since late March, we believe that the stock has little room for growth in the near future. 

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 49% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

 

In contrast, here’s how SNPS and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Synopsys vs S&P 500 Performance Over 2007-08 Financial Crisis

SNPS stock declined from levels of around $27 in September 2007 (pre-crisis peak) to levels of around $19 in March 2009 (as the markets bottomed out), implying SNPS stock lost 32% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $22 in early 2010, rising by 20% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51%.

Synopsys Fundamentals in Recent Years Look Strong

Synopsys Revenues grew a strong 55% from $2.2 billion in 2015 to $3.4 billion in 2019, with US contributing to more than 50% of Total Revenue. With the strong growth in revenues, the company’s margins also expanded from 10% to nearly 16%, resulting in a stellar 143% EPS growth from $1.46 in 2015 to $3.55 in 2019. The company’s Q3 2020 (ended July) revenues were 13% above the level seen a year ago, and the EPS figure for the quarter was up from $0.67 in Q3 2019 to $1.67 in Q3 2020.

Does Synopsys Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Synopsys total debt decreased from $205 billion in 2016 to $131 billion at the end of Q3 2020, while its total cash decreased from $1.1 billion to $1 billion over the same period. The company also generated $789 million in cash from its operations in the first nine months of 2020, and it appears to be in a good position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and in view of the strong rally in Synopsys’ stock since late March, we believe that the stock has little room for growth in the near future.

While Synopsys stock may have an upside, Think Apple stock is overvalued but still want to play the upside in Apple’s iDevices and the broader consumer electronics industry? Check out our theme on Apple Component Supplier Stocks.

 

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