Synopsys (SNPS) is playing a key role in the AI boom thanks to its chip design tools. I believe that SNPS shares deserve to have rallied along with other AI stocks due to the company’s digital, analog, verification, test, and manufacturing elements.
Synopsys stock has traded in the green for much of 2024, but a sharp July correction erased the gains. Shares are trading at approximately the same level they were at the beginning of the year. In my view, the recent dip presents an opportunity for investors, and I’m bullish. SNPS stock has been a long-term winner, having rallied more than 250% over the past five years.
The Artificial Intelligence Pie
Artificial intelligence has brought good fortune to corporations who are involved in this technology, as businesses scramble to incorporate AI into their operations. That trend is one of the reasons I am bullish on the stock. Precedence Research projects that the AI industry will maintain a 19.3% compounded annual growth rate from now until 2034, and while that projection certainly won’t be spot-on, expectations of strong growth are almost universally embraced.
Corporations are pouring their money into AI chips. That will lead to more demand for those chips, plus the necessary services involved in chip production. This should be good news for Synopsys which warrants a higher stock price, in my opinion. Recent financial results are also supportive.
Synopsys’ Q3 revenue increased by 13% year-over-year in the third quarter of fiscal 2024 to reach $1.526 billion. The firm is on pace to exceed $6 billion in revenue for fiscal 2024. Meanwhile, Q3 GAAP net income increased by 27% year-over-year, reaching $425.9 million. Synopsys has produced several solid quarters like this one, and yet the stock price is flat. I see a disconnect here that investors can capitalize on while the stock remains in its correction.
Synopsys Covers High-Growth Verticals
Synopsys’ corporate presentation details which business areas the firm serves, and those include autonomous vehicles, cloud computing, 5G, artificial intelligence, smart devices, and other verticals. These industries are growing at fast rates. Cloud computing is projected to maintain a 16.40% CAGR past 2029, while the autonomous vehicles market is projected to grow at a blistering 33% CAGR from now until 2033. Grand View Research anticipates a 22.9% CAGR for the 5G industry.
Semiconductors form the bedrock of many of these industries, and those companies will have to invest in plenty of AI chips to keep up with the competition. As the trend continues, more companies will likely turn to Synopsys for its chip design tools and software.
Synopsys has established itself as a leader in chip design for more than 35 years. The corporation is approaching an $80 billion market cap and is set to generate more than $6 billion in annual revenue this year. These metrics demonstrate Synopsys’s commanding position within the industry.
The Ansys Acquisition Will Represent Market Consolidation
Back in January, Synopsys announced the planned acquisition of software firm Ansys (ANSS) which is another reason to be bullish on SNPS stock. This merger is expected to be finalized in the first half of 2025, subject to the approval of regulators. Shareholders approved the acquisition earlier this year. Ansys shareholders are set to receive $197 and 0.345 shares of Synopsys for each ANSS share they own. The conversion to Synopsys shares could be one of the reasons the stock price hasn’t enjoyed as much of a rally, as some investors may be selling their positions forward.
Synopsys should report elevated revenue and net income once the acquisition goes through, and good synergies between the businesses can lead to greater market share for the combined entity. Synopsys recently decided to sell its optical solutions group to increase the likelihood that regulators approve the acquisition. That sale will only go through if the Ansys acquisition is approved, however. It’s an olive branch to regulators that could pay off, allowing the two industry giants to join forces.
Do Analysts Recommend Synopsys as a Buy?
Synopsys is rated as a Strong Buy on TipRanks. The stock has 10 Buy ratings from Wall Street analysts, against zero Hold and Sell ratings. The average SNPS stock price target is $650.56, which represents about 27% potential upside from current levels. Recent analyst actions have been optimistic. The highest price target of $687 is more than 30% above where the stock trades now.
The Bottom Line on Synopsys Stock
Synopsys is a key beneficiary of the AI boom that has been in business for more than 35 years. The firm generated more than $5 billion in revenue last year and is on pace to reach a new record. Despite other AI stocks charging toward all-time highs, Synopsys remains in a correction that has resulted in a flat stock price year-to-date. Despite the forgettable stock performance in recent times, Synopsys has delivered solid financial results. That suggests a mismatch between business performance and the current stock price. Analysts seem to be in universal agreement given the unanimous positive ratings from the 10 analysts who cover SNPS stock.
