Market Participants Recognise Synopsys, Inc.'s (NASDAQ:SNPS) Earnings

By
Simply Wall St
Published
July 27, 2020
NasdaqGS:SNPS
Source: Shutterstock

With a price-to-earnings (or "P/E") ratio of 61.2x Synopsys, Inc. (NASDAQ:SNPS) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Synopsys has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Synopsys

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NasdaqGS:SNPS Price Based on Past Earnings July 27th 2020
Want the full picture on analyst estimates for the company? Then our free report on Synopsys will help you uncover what's on the horizon.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Synopsys' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 72% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% per annum over the next three years. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

In light of this, it's understandable that Synopsys' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Synopsys maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Synopsys has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Synopsys. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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