Expanding TAM with Ansys Acquisition Enhances Silicon to System Strategy and Fuels Revenue Growth

What are the underlying business or industry changes driving this perspective?

• The anticipated acquisition of Ansys is expected to significantly expand the TAM by 1.5x to $28 billion, enhancing Synopsys' silicon to system strategy and potentially boosting revenue growth.
• Increasing design starts in response to the era of pervasive intelligence, driven by AI, silicon proliferation, and software-defined systems, are likely to contribute to higher revenue.
• The strategic focus on multi-die packaging, as evidenced by wins in 3DIC Compiler platform, is poised to create opportunities for both the EDA and IP businesses, impacting revenue growth.
• The launch of new products like the ARC-V RISC-V based portfolio, addressing broad applications such as automotive, storage, and IoT, is likely to drive revenue by meeting diverse market needs.
• The solid start to the year with revenue at the upper end of the guidance range and an increase in non-GAAP EPS suggests operational efficiency and could lead to margin expansion and earnings growth.

How have these above catalysts been quantified?

• Analysts are assuming Synopsys's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.0% today to 24.6% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $14.37) by about March 2027, up from $1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.8x on those 2027 earnings, down from 60.8x today.
• To value all of this in today’s dollars, we will use a discount rate of 6.88%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Economic downturns or market volatility could affect customer spending and investment in new technologies, potentially reducing demand for Synopsys' products and services, which would impact revenues.
• Delays or complexities in the closure of the Ansys acquisition could lead to uncertainties and potential investor hesitancy, affecting Synopsys' stock price and future investment.
• The integration of Ansys into Synopsys may encounter challenges, including cultural integration and realization of expected synergies, which could affect the company's operational efficiencies and net margins.
• Rapid technological changes and the emergence of new competitors with innovative solutions could reduce Synopsys' market share and impact earnings.
• Regulatory changes, especially related to export controls and international trade, could limit Synopsys' operational flexibility and affect its revenue growth, particularly in key markets like China.

• The analysts have a consensus price target of $626.11 for Synopsys based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $8.7 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 49.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $560.63, the analyst's price target of $626.11 is 10.5% 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.