Synopsys (SNPS) Margin Compression to 18.1% Tests Bullish High-Growth Valuation Narrative

Synopsys (SNPS) just wrapped up FY 2025 with fourth quarter revenue of about $2.3 billion and basic EPS of $2.42, capping a year in which trailing 12 month revenue reached roughly $7.1 billion and EPS came in at $8.15. The company has seen quarterly revenue move from about $1.6 billion in the fourth quarter of FY 2024 to $2.3 billion in the latest quarter, while basic EPS shifted from $1.81 to $2.42 over the same period. This sets up a story in which investors will be weighing headline growth against how sustainable those margins look.

See our full analysis for Synopsys.

With the numbers on the table, the next step is to see how this latest run of results lines up with the prevailing narratives around Synopsys, and where those stories might need a reset.

See what the community is saying about Synopsys

Trailing Profit Margin Slides to 18.1%

• Over the last 12 months, Synopsys generated about $7.1 billion of revenue with net profit of roughly $1.3 billion, which works out to an 18.1 percent net margin versus 25.3 percent a year earlier.
• Bears focus on this margin pressure, arguing that integration costs and business transitions could weigh on profitability even if revenue grows.
  • The drop from 25.3 percent to 18.1 percent margins lines up with concerns that higher development spending and restructuring, including a 10 percent headcount reduction, may be biting into near term profitability.
  • At the same time, analysts still expect margins to edge up from 21.7 percent to 22.3 percent over the next three years, which challenges the bearish view that margin compression must be permanent.

Synopsys is walking a fine line between near term integration costs and its long term plan to rebuild margins as Ansys synergies and higher value IP kick in. 🐻 Synopsys Bear Case

Forecast Revenue Growth of 16.2% Supports Bull Case

• Analysts expect Synopsys revenue to grow about 16.2 percent per year, ahead of the broader US market forecast of 10.7 percent a year, with earnings projected to rise roughly 19.1 percent annually after growing 15.4 percent per year over the last five years.
• Supporters of the bullish view see these growth rates as evidence that Synopsys expansion into AI heavy chip design, advanced IP, and Ansys powered simulation can drive long term upside.
  • The Ansys combination expands Synopsys reach from silicon into broader engineering software, supporting the idea that a mid teens revenue growth outlook is realistic on a roughly $7.1 billion trailing revenue base.
  • The forecast that earnings could reach about $2.7 billion by around 2028, up from roughly $1.4 billion today, is consistent with the company pivoting toward higher margin SaaS, cloud, and integrated IP offerings.

Bulls point to these multi year growth projections as a reason the stock could justify its premium pricing if execution on AI, cloud delivery, and Ansys integration stays on track. 🐂 Synopsys Bull Case

Premium Valuation at 77.7x P/E

• Synopsys trades on a trailing price to earnings ratio of 77.7 times, above both peer levels around 63.9 times and the US software industry at 31.9 times, and above a DCF fair value of about 458.33 dollars per share compared with the current share price of 477.26 dollars.
• Critics warn that paying this kind of multiple leaves less room for error, especially with debt coverage by operating cash flow flagged as a major risk and some shareholder dilution over the past year.
  • The gap between the current price of 477.26 dollars and the DCF fair value of 458.33 dollars suggests the market is already factoring in a lot of the expected growth.
  • When you pair that premium P E with a step down in net margins from 25.3 percent to 18.1 percent, it reinforces the bearish argument that investors are relying heavily on the long term growth story to support this valuation.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for Synopsys on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

Notice something different in the results? Use that angle to quickly shape your own long term view in just a few minutes, Do it your way.

A great starting point for your Synopsys research is our analysis highlighting 1 key reward and 2 important warning signs that could impact your investment decision.

See What Else Is Out There

Synopsys pairs shrinking profit margins with a stretched valuation, leaving investors heavily exposed if the ambitious growth and integration plans slip.

If you want potential upside without paying such a rich multiple, use our these 908 undervalued stocks based on cash flows today to quickly pinpoint candidates with more attractive price tags.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com