Ansys Acquisition And AI Innovation Will Boost Silicon-to-Systems Strategy And Earnings

Key Takeaways

• Strategic acquisition of Ansys enhances Synopsys' silicon-to-systems strategy, improving growth potential and future revenue prospects.
  
• Secular growth drivers like AI and silicon proliferation boost demand for Synopsys products, positively impacting revenue and earnings.
  
• Economic uncertainties, market slowdowns, and integration risks could challenge Synopsys' revenue growth, profitability, and strategic acquisitions.

Catalysts

Provides electronic design automation software products used to design and test integrated circuits.

• The pending acquisition of Ansys signifies Synopsys' strategic investment in expanding their silicon-to-systems strategy, providing growth into adjacent areas and potentially leading to increased future revenue and earnings.
  
• Synopsys is poised to benefit from multiple secular growth drivers, including AI, silicon proliferation, and software-defined systems, which are expected to accelerate demand for their products, positively impacting revenue.
  
• The strong demand for AI and HPC chip designs positions Synopsys advantageously in a critical growth sector, likely enhancing revenue growth and earnings as industries recover and invest in AI futures.
  
• Adoption of AI-driven design methodologies such as Synopsys.ai is delivering customer results and could lead to efficiency-related improvements, thus boosting net margins.
  
• The anticipated closing of the Ansys deal may enable the company to achieve substantial operating margins and revenue synergies, influencing earnings growth positively.

Synopsys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synopsys's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.5% today to 27.3% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $14.62) by about December 2027, up from $1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.7 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.2x on those 2027 earnings, down from 53.8x today. This future PE is greater than the current PE for the US Software industry at 43.1x.
• Analysts expect the number of shares outstanding to grow by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Synopsys Future Earnings Per Share Growth

Risks

• The potential impact of escalating macro uncertainties in certain geographies, including China, could dampen Synopsys' revenue growth, as their business in such regions may face challenges due to economic deceleration and increasing trade restrictions.
  
• The slowdown in broader market segments such as mobile, PC, and automotive, as contrasted with the faster-growing AI infrastructure build-out, may not contribute significantly to Synopsys' revenue, potentially lowering overall expectations if these markets don't recover or adapt quickly.
  
• The shift in fiscal calendar and the mechanical effect on revenue from fewer operational days in fiscal 2025 reduces the expected revenue base, which might create operational and financial challenges impacting net margins and earnings.
  
• Execution risks related to the successful integration and performance outcomes from the pending Ansys acquisition might lead to increased operational costs and possible disruption, affecting Synopsys' anticipated growth in operating margins and earnings.
  
• Prolonged delays or regulatory challenges in finalizing the Ansys acquisition and other strategic shifts could lead to uncertainties in achieving the projected revenue growth and operating efficiencies, potentially affecting Synopsys' profitability.

Valuation

• The analysts have a consensus price target of $636.01 for Synopsys based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $699.0, and the most bearish reporting a price target of just $496.12.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.7 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 53.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $505.32, the analyst's price target of $636.01 is 20.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.