Software company Synopsys (SNPS) is one of the three major vendors of electronic design automation (EDA) software, the other two being Cadence Design (CDNS) and Siemens. The company announced upbeat third-quarter Fiscal 2022 results last week, prompting five-star-rated JPMorgan (JPM) analyst Harlan Sur to point out a few reasons why he is bullish on the company, one of them being SNPS’ ability to handle a downturn.
Why Sur is Sure of Synopsys
Strong adoption of its platforms on the back of increased customer demand for advanced computing is helping the company maintain its leadership position in the market, as well as address customers’ challenges in design verification. This is also driving a secular growth opportunity for Synopsys.
With the advancement of technology and the emergence of intelligent applications, microchip designs are also becoming more complex. Cloud OEM and system OEM customers specializing in custom ASIC designing are rapidly being onboarded by Synopsys on its EDA software tools.
In the company’s July-end quarter, it witnessed strong bookings growth (and consequently, an expanding backlog) as well as solid chip design activity, a trend that Sur expects to continue. This sets a base for continued top-line growth in 2023, “even in the face of a potential macro/semiconductor industry slowdown,” according to the analyst.
“As we have previously written, EDA fundamentals remain strong, and EDA is one of the most defensive segments of the semiconductor value chain in a macro downturn given that chip design is tied to semiconductor company R&D budgets (which don’t get cut in downturns),” analyzed Sur.
Moreover, Sur expects mid-single-digit percent revenue growth in the core tools of the EDA Software segment, indicating that the market will remain stable for Synopsys despite intense competition. This is because the dominance of the top three EDA vendors mentioned earlier reduces the chances of any other vendor matching their power.
Again, Synopsys is running ahead of the EDA industry’s speed thanks to its focus on emulation, artificial intelligence, and market share growth of a “faster-growing software integrity business segment” in its mix of offerings. Now, the Software Integrity business segment has been going through rough patches, but Sur expects growth to smoothen and accelerate, providing a solid catalyst for stock outperformance.
Also, Synopsys is targeting an operating margin goal of 30% this year, another reason why Sur believes that SNPS stock has solid room for upward movement.
Needless to say, Sur maintained a Buy rating on the stock and raised his price target to $440 from $400.
Is Synopsys Stock a Buy?
All but one Wall Street analysts covering SNPS stock are bullish. The stock has a Strong Buy consensus rating based on nine Buys and one Hold. The average SNPS stock price prediction is $418.40, which suggests 17.9% upside potential from current levels.
Concluding Thoughts: Synopsys Can Weather a Storm
Summing up, Sur has faith in his analysis, which indicates several positive qualities for Synopsys. The company’s dominant position in the niche semiconductor market segment of EDA software is expected to protect it from any headwinds even during a potential downturn, making it a compelling stock, he believes.
