Pending Ansys Acquisition And AI Advancements Will Strengthen Future EDA Industry Leadership

Key Takeaways

• Synopsys' AI-powered design solutions and leadership in EDA tools are expected to drive revenue growth and improve market position.
  
• Strong demand for design IP and advanced node activities will enhance revenue and operating margins through innovative solutions.
  
• Challenges in target markets and reliance on acquisitions, regulatory factors, and specific sectors could impact Synopsys' revenue growth and strategic positioning.

Catalysts

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

• Synopsys' pending acquisition of Ansys is anticipated to pave the way for new AI-powered design solutions, potentially boosting revenue as it provides R&D teams with innovative tools to enhance product development.
  
• The launch of HAPS-200 and ZeBu-200 systems, offering up to 2x better performance, is expected to strengthen Synopsys' hardware-assisted verification market position, driving revenue from semiconductor companies like AMD and NVIDIA.
  
• Synopsys' leadership in AI-driven Electronic Design Automation (EDA) tools and innovation in generative and agentic AI capabilities may lead to significant productivity gains for customers, potentially improving Synopsys' revenue growth and market share in the EDA industry.
  
• The robust design activity at advanced nodes, particularly with Fusion Compiler being the platform of choice for 2-nanometer projects, indicates strong future demand, which is likely to positively impact revenue growth.
  
• Growth in the design IP segment, especially with strong demand for advanced interface IP solutions like PCIe 7.0 and Ethernet for AI and mobile applications, could enhance revenue and operating margins as customers seek to improve performance per watt and handle complex protocol transitions.

Synopsys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synopsys's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.4% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $14.42) by about March 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.1x on those 2028 earnings, down from 54.4x today. This future PE is greater than the current PE for the US Software industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

Synopsys Future Earnings Per Share Growth

Risks

• The end market for industrial, automotive, and consumer electronics remains challenged, which could potentially impact Synopsys' revenue and limit growth opportunities in these sectors.
  
• Deceleration and headwinds in China, including regulatory restrictions and a slowing local economy, may result in revenue growth below the corporate average, potentially affecting overall company revenue.
  
• Dependency on the pending acquisition of Ansys and its regulatory approvals could pose a risk to Synopsys' strategic growth plans, potentially impacting future revenue and margins if not completed as anticipated.
  
• The timing of revenue from Design IP, which was down 17% year-over-year, highlights volatility and could impact quarterly revenue targets and financial predictability.
  
• While AI and HPC markets are robust, the reliance on these sectors for growth could pose a risk if there is any downturn or increased competition, which could impact Synopsys' revenue growth and market positioning.

Valuation

• The analysts have a consensus price target of $625.248 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 $690.0, and the most bearish reporting a price target of just $520.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.0 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 53.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $457.23, the analyst price target of $625.25 is 26.9% 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.