2023-08-18 11:36:10 ET
Summary
- Although NVIDIA has attracted the attention of growth investors, many other application software companies are playing a pivotal role in bringing AI ambitions to life. Synopsys is one.
- The world's top semiconductor companies, including IBM, Intel, and NVIDIA, have partnered with Synopsys.
- Synopsys.ai is the industry's first full-stack, AI-driven EDA suite.
- The company's three-pronged AI strategy will be at the center of its growth story in the foreseeable future.
- The company is fairly valued from a historical perspective but now may not be the time to book gains.
2023, so far, has been a banner year for many chip companies with exposure to artificial intelligence technology. For instance, NVIDIA Corporation (NVDA), which is widely believed to be a big winner in the increasing adoption of AI, has seen its market value surge more than 200% this year. Although NVIDIA and a few big names have attracted the attention of investors, many other application software companies are playing a pivotal role in bringing AI ambitions to life. Synopsys, Inc. (SNPS) is one such company.
Synopsys is a leading company in the field of electronic design automation, semiconductor intellectual property, and software security and quality. The company provides solutions and services to help customers innovate from silicon to software, enabling the development of smart devices and systems for various industries and applications. Synopsys was founded in 1986 and has grown to become the world's largest EDA supplier by revenue, with a broad portfolio of silicon design, verification, IP integration, and software security and quality testing tools. Synopsys also offers optical design, illumination design, and photonic design software for optical systems. The company is at the forefront of the Smart Everything movement, a new era of innovation driven by high-performance silicon chips and exponentially growing amounts of software content.
Establishing Dominance Across Business Segments
The company reported $1.487 billion in revenue for the third quarter, a 19% year-over-year increase driven by the restart of chip design manufacturing after a lengthy halt and initiatives to capitalize on AI-powered everything. In an era where technological advancements are reshaping industries, Synopsys is emerging as a major force in the EDA market. The company is a global leader in the $9.9 billion design automation market, accounting for nearly 65% of its revenue. What truly distinguishes Synopsys' AI-driven EDA innovation is its widespread adoption. An impressive feat that cannot be overlooked is the deployment of the company's products in the manufacturing processes of nine out of the top ten semiconductor giants.
The world's top semiconductor companies including NVIDIA, International Business Machines Corporation (IBM), Samsung, Taiwan Semiconductor Manufacturing Company Limited ( TSM ), and Renesas Electronics Corporation (RNECF) use Synopsys technology, demonstrating the company's market dominance and its power in handling the challenges and opportunities of chip design in the AI era. Synopsys.ai is the industry's first full-stack, AI-driven EDA suite, with DSO.ai for design optimization, VSO.ai for verification and bug identification, TSO.ai for testing, and Analog and Manufacturing for analog design migration and lithography model generation.
Exhibit 1: Revenue
Synopsys has firmly established itself as an innovative leader in the domain of Design IP. With a commanding presence in this $6.7 billion market, the company has harnessed the power of reusable building blocks, ushering in a new era of efficiency and cost-effectiveness in chip design. As a leading supplier of interface, memory, analog, and physical IP, the company derives 25% of its revenue from this sector. What makes Synopsys' Design IP expertise particularly compelling is its profound impact on customer outcomes. The company solves fundamental issues in chip design by enabling its customers to reduce design costs, manage risks, and accelerate time to market by delivering reusable building blocks that incorporate years of expertise. This helps drive not only profitability but also resilience in a fiercely competitive ecosystem. Synopsys' strategic focus is also influenced by its approach to markets with growth potential. The company's reach extends to high-impact, rapidly developing markets such as AI, IoT, Automotive, Security, and Cloud Computing.
Exhibit 2: Synopsys IP portfolio
The company already has a long-term partnership with Intel Corporation (INTC), which is focused on EDA and IP solutions that enable Intel to address the demanding requirements of data-intensive applications. Synopsys and Intel recently announced the expansion of their IP and EDA collaboration to allow essential IP on Intel's advanced process nodes. Synopsys will offer a portfolio of designs that will work with Intel's advanced manufacturing capabilities Intel 3 and Intel 18A. By deploying Synopsys's standardized interface IP portfolio on Intel's advanced process technologies, Intel's foundry customers gain the advantage of leveraging IPs constructed on these technologies. This facilitates faster design execution and project timelines for system-on-chips (SoCs).
Synopsys is making significant progress in Software Integrity as well. Diving deeper into this domain, Synopsys has extensively developed the most comprehensive array of products in the market, bringing in revenue of more than $0.5 billion in the trailing twelve months. This achievement demonstrates the company's unwavering commitment to addressing the serious issues confronting today's software-driven economy. These solutions go far beyond traditional offerings; they enable enterprises to manage application security, quality standards, and the complex web of compliance issues with the agility that modern businesses require.
Looking closely at the markets Synopsys serves, it's clear that the company will continue to have a big impact on the Software Integrity market. This market is worth somewhere between $2.5 billion and $3 billion. However, the market is divided with many diverse solutions that frequently do not fit together effectively. This uncertainty is exacerbated by the fact that people are becoming more aware of the serious consequences of software failure. As the world becomes increasingly reliant on digital technology, the expense of software failures has skyrocketed. This has increased the importance of software integrity for businesses. In this complex environment, Synopsys is emerging as a leader with its solutions covering a wide range of industries, from embedded systems and semiconductors to the broad areas of finance, medical, industrial, and automotive sectors.
Exhibit 3: Synopsys software integrity portfolio
Furthermore, Synopsys sees massive growth opportunities in software security and quality and is at the forefront of assuring robust and dependable software integrity. This market category has a total addressable market value of $4.5 billion to $6.5 billion, as well as a Serviceable Addressable Market of $2.5 billion to $3 billion. Synopsys, in its pursuit of sustainable growth, has set forth a long-term multi-year objective to grow revenue in the range of 15% to 20%. With its deep-rooted expertise and comprehensive portfolio, the company is poised to leverage the growth catalysts within the software security and quality market.
Recently, Synopsys announced a strategic collaboration aimed at bolstering its Software Integrity Group's suite of application security testing solutions. Partnering with NowSecure, a leader in mobile security and privacy, as well as Secure Code Warrior, a provider of agile learning platforms for developer-driven security, Synopsys aims to fortify its position at the forefront of the industry. This concerted effort extends a valuable opportunity for Synopsys' clientele to proactively navigate the ever-evolving security threats landscape.
Furthermore, the company introduced Synopsys Software Risk Manager, a robust application security posture management ((ASPM)) solution. This innovative tool empowers security and development teams to harmonize and streamline their application security testing endeavors across diverse projects, teams, and AST tools. According to Gartner, by 2026, over 40% of organizations with proprietary applications will embrace ASPM to detect and address application security issues. In May, the company achieved significant recognition by Gartner as a Leader in the Magic Quadrant for Application Security Testing for an impressive seventh consecutive year. This accolade reaffirms Synopsys' unwavering dedication to delivering cutting-edge solutions that shape the landscape of application security testing and underscores its key role in securing the digital future.
Exhibit 4: The Magic Quadrant for Application Security Testing
The Earnings Momentum Will Continue
The consensus Wall Street estimate for Fiscal 2023 EPS has seen 11 positive revisions in the last three months against no negative revisions. Consistently positive earnings revisions are often associated with increasing stock prices, and Synopsys stock has certainly not disappointed this year. I believe the earnings revisions momentum will continue in the future with the company aggressively diversifying into new business segments to drive growth.
The company's three-pronged AI strategy - Design participation in AI-optimized semiconductors, Embedding AI across the EDA stack, and Internal use of AI to improve efficiencies - will be at the center of its growth story in the foreseeable future. In addition, Synopsys will benefit from the increasing adoption of 5G technology, autonomous driving, and cloud computing as well. The more complex the chip designing process becomes to support these technologies, the higher the demand for the company's EDA software will be.
Current Market Valuation Is A Concern
As a potential investor, valuation is the only concern that I have today. Synopsys has traded at an average TTM P/E of 64.95 in the last five years, and today, the company is valued at a P/E of 64. This suggests the company is fairly valued from a historical perspective. At a forward P/S multiple of 11, it is reasonable to think that the bulk of future revenue growth is already priced in. At a time when some AI names are nearing bubble territory, I am concerned about Synopsys having to bear the brunt when the bubble bursts. Synopsys, in my opinion, is certainly not in bubble territory and the company is a true winner of the ongoing digital transformation. However, this will not stop the company from being hurt when some of the promising AI companies fail to deliver the desired financial results in the coming years.
Takeaway
Synopsys, having reported record earnings for the third quarter and raising full-year revenue guidance, seems well-positioned to maintain its growth momentum. With the integration of AI technology gaining traction, Synopsys finds itself in a nice spot from where it can grow in multiples. Today, around 10% of the company's revenue can be attributed to AI chip designs-a testament to how the company has emerged as a winner of this new technology. In the broader context of AI demand, we are in the early stages of a growth trajectory. The demand for computing power is growing in parallel with the growth of AI applications. This necessitates the need for chip designs customized to these computational demands, a market in which Synopsys is well-positioned to succeed. The software offerings of the company are critical in allowing these sophisticated chip designs. Although Synopsys is not valued cheaply, I see no reason for existing investors to book their gains just yet.
For further details see:
Synopsys: A Winner In The Smart Everything Era