Is Synopsys Still Worth the Premium After Recent Volatility and AI Growth Headlines?

If you’re weighing what to do with Synopsys stock right now, you’re not alone. Investors have plenty to consider after a turbulent few weeks that saw the stock rebound 3.6% in the past week but still lag about 7% from where it stood a month ago. Despite a five-year run-up of more than 100%, the shares have cooled off in recent months, which has people wondering if this is just a pause or if risks are being repriced in.

What’s behind these shifts? Recent headlines have focused on Synopsys’s expanding footprint in the semiconductor design space and steady execution in their core electronic design automation business. Industry-watchers have noted the company’s increasing role in enabling AI-powered chip development, which could unlock new growth avenues in the future. Still, broader market jitters around technology suppliers have clearly affected risk perceptions, as shown by the recent slippage in the year-to-date return.

Looking at valuation metrics, Synopsys earns a value score of 1 out of 6 according to our latest screen. This means it’s considered undervalued in just one of six key checks. That’s enough to prompt a deeper look but not quite a flashing bargain sign yet.

How do the various valuation methods stack up? In the next section, we’ll break down each approach and explain why there may be an even better way to judge Synopsys’s true worth by the end of the article.

Synopsys scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Synopsys Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model works by forecasting a company’s future cash flows and then discounting them back to their present value to estimate what the business is worth today. For Synopsys, this involves projecting how much cash the company is expected to generate over time and factoring in the time value of money to determine what that is worth in today's dollars.

Synopsys’s latest reported Free Cash Flow stands at $1.26 Billion. Analyst estimates suggest this number could double in the next few years, with Free Cash Flow anticipated to reach about $4.56 Billion by 2029. After analysts' forecasts run out in about five years, projections are extrapolated using a consistent growth rate. All projections are reported in $.

The DCF model used here results in an intrinsic fair value estimate of $422.41 per share for Synopsys. Currently, the stock is trading about 8.0% above this fair value, indicating it may be slightly overvalued according to this method.

Result: ABOUT RIGHT

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Synopsys.

Simply Wall St performs a valuation analysis on every stock in the world every day (check out Synopsys's valuation analysis). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes.

Approach 2: Synopsys Price vs Earnings (PE Ratio)

For profitable companies like Synopsys, the Price-to-Earnings (PE) ratio is a widely used and relevant valuation tool. It helps investors judge how much they are paying for each dollar of current earnings, providing a straightforward way to compare different stocks or industries.

What counts as a “normal” or “fair” PE ratio depends on a company’s growth potential and perceived risk. Fast-growing, stable companies typically command higher PE ratios, as investors expect future earnings to increase and are willing to pay a premium.

Right now, Synopsys is trading at a PE ratio of 72.6x. This is higher than both the software industry average of 33.6x and the peer average of 70.7x, suggesting a significant growth premium is being priced in.

Simply Wall St’s Fair Ratio takes things a step further. Instead of just comparing Synopsys to peers or industry norms, the Fair Ratio considers earnings growth, risks, profit margins, industry, and market capitalization to provide a customized benchmark. This tailored approach gives a more complete picture of what Synopsys’s valuation should be today.

With a Fair Ratio of 47.6x versus Synopsys's actual 72.6x, the stock currently trades well above our tailored benchmark. This suggests that Synopsys may be overvalued based on this key multiple.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Synopsys Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives.

A Narrative is your personal perspective on Synopsys. It is the story you believe about the company's future, backed up by your own forecasts for revenue, earnings, and profit margins, and expressed as an estimate of fair value.

Rather than just accepting one “right” number, Narratives connect the company’s unique business story and the trends you find important directly to financial forecasts and value estimates. This makes your investment view both more meaningful and actionable.

Narratives are easy to use and available on Simply Wall St's platform in the Community page, where millions of investors build and share their own. This allows you to quickly compare your thinking with others.

When you create a Narrative, Simply Wall St automatically ties your assumptions to a dynamic valuation. As news or earnings updates come in, your Narrative updates as well.

This empowers you to clearly see when your Fair Value diverges from the current share price, helping you decide when to buy, hold, or reassess.

For example, some investors’ Narratives for Synopsys are bullish, assuming the integration of Ansys and AI-focused demand will send the stock above $715. Others, more cautious about risks, see fair value closer to $550. This reminds us there is no one-size-fits-all answer, but rather a smarter way to invest that is tailored to you.

Do you think there's more to the story for Synopsys? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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