2023-09-28 06:11:50 ET
Summary
- In a tech landscape defined by trends like the "Smart Everything" era, Synopsys holds a pivotal role with 10% of its trailing revenues already coming from AI trends.
- Despite slightly weaker cash flows expected this year, SNPS boasts a favorable valuation.
- The company's valuation remains reasonable, historically priced at 9x to 12x forward sales, and it maintains a robust balance sheet with significant cash reserves.
Investment Thesis
Synopsys ( SNPS ) plays a vital role as a partner from silicon to software, assisting its customers in achieving faster time-to-market, high-quality results, and risk mitigation, whether they are in the semiconductor or software development sectors.
Synopsys' prospects are strong and expected to continue improving. The only blemish to this investment thesis is that Synopsys' cash flows this year are likely to end up slightly weaker than its previous year.
But putting that aside, its valuation is not stretched, particularly when we consider the sector in which it operates. All in all, the stock is priced at approximately 40x this year's cash flows, with a "virtually" debt-free balance sheet.
This may not be the most well-known stock, but I believe that it soon will be better known.
Synopsys' Near-Term Prospects
Synopsys is a company in the semiconductor and software industries, specializing in providing solutions to help chip and system engineers, as well as software developers, optimize their processes.
In the semiconductor domain, they offer a wide range of products and services that facilitate complex chip designs, especially as modern chips combine numerous components into single systems-on-chip (SoCs). These components include processors, communications, memory, and more. Synopsys' tools assist designers in automating tasks, adding intelligence to the design process, and reducing errors.
They also provide pre-configured circuits (IP products) ready for chip designs, enhancing efficiency and saving time for their customers. Moreover, Synopsys supports the manufacturing of these intricate devices, addressing challenges introduced by advanced techniques like multiple-patterning lithography and FinFET 3D transistors (a type of field-effect transistor ("FET") that has a thin vertical fin and it's so named because of the unique fin-like structure instead of being completely planar).
In the software arena, Synopsys offers products to help developers create high-quality, secure code with fewer defects. This is critical given the increasing complexity of software applications used in various smart devices. Their solutions include code analysis for quality and security, automation in the software testing process, and defect elimination.
As the usage of open-source software becomes prevalent, Synopsys' products also help manage the composition and security of the code.
Presently, Synopsys stands as an important player in an ever-evolving tech landscape marked by several industry-defining trends. As we enter the age of "Smart Everything," the surge in interconnected devices, AI, and the Internet of Things ("IoT") has sparked an insatiable demand for cutting-edge semiconductor solutions. Synopsys, a leader in electronic design automation ("EDA") and software integrity, is at the forefront of these transformative trends.
The company leverages AI's disruptive potential to automate facets of chip design, enhancing power efficiency, and improving verification processes for its customers. With semiconductor complexity reaching unprecedented levels, Synopsys provides an array of tools that cater to the entire chip design lifecycle, addressing architecture, manufacturing, and complexity management.
Moreover, as the world embraces smart devices and IoT sensors, Synopsys empowers its customers to create chips tailored to the demands of this interconnected ecosystem.
By ensuring software security, especially in critical domains like automotive systems and smart devices, Synopsys plays a vital role. Additionally, its tools and IP enable chip designers to navigate the intricacies of advanced manufacturing processes, together with high-performance, low-power chips.
As readers will be aware, there's a surge in AI chip demand. This demand allows Synopsys to stand as a key EDA provider for AI-focused chip designers.
In essence, Synopsys, together with others, is shaping the future of the semiconductor and software sectors.
But there's more to this stock than just an attractive story. Synopsys has the financials to back its narrative.
Revenue Growth Rates Are Strong
At the surface level, it appears that Synopsys' revenue growth rates are remarkably strong and accelerating. However, we have to keep in mind that the comparables with the prior year become progressively easier, making the quarterly performance this time around look notably strong.
Furthermore, we should keep in mind that since the start of fiscal 2023, Synopsys has consistently guided for about 14% to 15% CAGR. In other words, the market has been pricing in these revenue growth rates for some time.
Naturally, as we are closing in on Synopsys' fiscal Q4 2023, we are forced to appraise what could fiscal 2024 look like?
Put another way, if Synopsys ends up delivering around 14% revenue growth rates next year, this would imply that fiscal Q1 2024 would be particularly strong, but that after fiscal Q1 2024, with each passing quarter, its revenue growth rates would be decelerating.
Consequently, as the market looks beyond the next two quarters and starts to price in its growth prospects, the market's expectations are for more moderate growth rates.
Coincidently, that's what analysts expect from Synopsys too, see below.
SA Premium
Synopsys is well-positioned in a rapidly evolving technological landscape characterized by several key industry trends. In the era of "Smart Everything," the proliferation of connected devices, artificial intelligence ((AI)), and the Internet of Things ("IoT") has led to a significant demand for advanced semiconductor solutions. Synopsys, as a leader in electronic design automation ("EDA") and software integrity, plays a crucial role in shaping these trends. To back up this, consider what management said on the earnings call :
AI chips are a core value stream for Synopsys, already accounting on a trailing 12-month basis for well over $0.5 billion. We see this growth continuing throughout the decade.
More specifically, Synopsys' exposure to the most coveted trends in the industry already reaches 10% of its trailing revenues.
Now, let's discuss its valuation.
Profitability Continues to Move Higher
Before discussing its profitability, it's useful to think about its valuation.
Over the past 2 years, despite everything that's happened in the market, this stock has generally been priced at approximately 9x to 12x forward sales. Irrespective of any geopolitical tensions, Russian invasion, rising interest rates, and other worries. Yes, there are short periods where its valuation has been out of this range, but thinking in this framework is helpful. Why?
Because my point here is that the stock is clearly not expensive. It's perhaps one of a handful of companies with significant exposure to AI, at 10% of revenues and growing rapidly, and yet, it's not in bubble territory.
And best of all? It has $1.8 billion of cash and equivalents against $18 million of debt (no typo).
Yes, this year's cash flow is expected to be slightly weaker than fiscal 2022, but with so much exposure to the right sectors, I believe this cash flow could be well poised to improve in fiscal 2024. In sum, there's a lot to like here.
The Bottom Line
Synopsys plays a pivotal role as a partner spanning silicon to software. While it anticipates slightly weaker cash flows this year, Synopsys' prospects remain strong. Valuation-wise, it stands at approximately 40x this year's cash flows, with a virtually debt-free balance sheet.
In a rapidly evolving technological landscape marked by trends like the "Smart Everything" era, Synopsys holds a crucial position. Further, its exposure to the most coveted AI trends already accounts for 10% of its trailing revenues, and it anticipates this growth to continue.
Furthermore, Synopsys' valuation remains reasonable, with a history of being priced at around 9x to 12x forward sales. While this year's cash flow may be slightly weaker, its substantial exposure to the right sectors suggests the potential for improvement in fiscal 2024.
In summary, Synopsys combines industry leadership, a rock-solid balance sheet, and a favorable valuation, making this a somewhat unknown but mighty attractive investment opportunity.
For further details see:
Synopsys: Pioneering AI Trends With A Reasonable Valuation