Synopsys stock: Unsung hero of the AI revolution

Synopsys Inc. (NASDAQ: SNPS), maker of semiconductor design software, created a buzz recently when it offered to buy engineering software maker Ansys Inc. (NASDAQ: ANSS).

Synopsys isn’t a newcomer to the chip design world, and has been making a name for itself with AI technologies, but it’s less well-known than chipmakers themselves.

As a technology stock, Synopsys is a component of the Technology Select Sector SPDR Fund (NYSEARCA: XLK). In 2023, the stock returned 62.05%. 

Synopsys’ customers include AI powerhouses Advanced Micro Devices Inc. (NASDAQ: AMD), Intel Corp. (NASDAQ: INTC) and Nvidia Corp. (NASDAQ: NVDA).  

Ansys valuation may be overly rich

News of the Ansys acquisition put a dent in the stock’s price, as Synopsys is reportedly offering over $400 a share, a valuation analysts believe is too rich. 

But investors who weren’t aware of Synopsys or its AI potential prior to the deal announcement may want to familiarize themselves with Synopsys stock.

Synopsys specializes in a category of software called electronic design automation, or EDA, for electronics and semiconductor applications. 

According to Synopsys, EDA consists of software, hardware, and services with the collective goal of designing, implementing, verifying and manufacturing chips. Synopsys is the largest provider of EDA technologies.

"Bolstered by AI and machine learning capabilities" 

In regulatory filings, Synopsys said, “Many of our EDA solutions are bolstered by AI and machine learning capabilities. In addition, we offer Synopsys.ai , the first product in the market that brings AI to the entire design process.” 

This process takes over repetitive tasks, freeing up engineers to focus on chip quality and differentiation, and helps them quickly move chip designs to the manufacturing process. 

Other EDA providers include Altair Engineering Inc. (NASDAQ: ALTR), Ansys, Autodesk Inc. (NASDAQ: ADSK) and Cadence Design Systems Inc. (NASDAQ: CDNS). 

As you might guess, the great AI frenzy of 2023 drove Synopsys’ price move, with analysts believing continued investment in AI chips bodes well for Synopsys’ future growth.

Leader among large-cap price performers

Among chip design stocks, large-caps Synopsys and Cadence are among the top price performers, although the much smaller Altair, whose market capitalization is $6.89 billion, has led recently. 

A glance at MarketBeat’s Synopsys analyst forecasts shows a rating of “buy,” indicating strong agreement that the company is well positioned for growth.

The consensus price target is $576.70, an upside of 11.44%. That would put the stock’s price above its December 13 high of $573.77. The catalyst for that move was a Wells Fargo price target increase to $630 from $620. 

Synopsys went public in 1992, but in a capital-intensive industry, the company continues to prioritize reinvestment into research and development over dividends. 

Share buyback program

However, the company has returned capital to shareholders through a share buyback program.

In fiscal 2022, Synopsys authorized the purchase up to $1.5 billion of its common stock. As of October 31, 2023, $194.3 million remained available for future repurchases.

In August 2023, it entered into an accelerated share repurchase agreement to buy back an aggregate of $300 million of its common stock. 

Companies may choose not to pay dividends but opt for share buybacks as a way of attracting and retaining investors. By repurchasing shares, the company is signaling confidence in its future growth. It’s a mechanism for reinvesting profits to increase the stock’s value. 

Beating analysts's Q4 views

Synopsys stock got a boost in late November, following its fourth-quarter report. The company earned $3.17 per share on revenue of $1.6 billion, topping both net income and revenue views.

Year-over-year revenue growth accelerated in the past three quarters, while earnings accelerated in the past two. You can spot those trends using MarketBeat’s Synopsys earnings data. 

That means the stock has already been among the market leaders, and analysts believe the Ansys acquisition could put Synopsys in an even better position to benefit from increased adoption of AI.

The Synopsys chart shows the post-acquisition-announcement pullback, based on views that Synopsys may be overpaying for Ansys. However, you can also see that the stock appears to be finding support near its 50-day average, an indication that investors may view the outlay for Ansys as only a temporary setback.