We came across a bullish thesis on Synopsys, Inc. (SNPS) on Substack by The Equity Analyst. In this article, we will summarize the bulls’ thesis on SNPS. Synopsys, Inc. (SNPS)’s share was trading at $531.33 as of Feb 10th. SNPS’s trailing and forward P/E were 57.44 and 35.97 respectively according to Yahoo Finance.
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Synopsys, a leader in electronic design automation (EDA) and semiconductor intellectual property (IP), plays a pivotal role in the design of modern chips powering everything from smartphones to AI-driven systems. As chip designs have grown more complex, Synopsys has become an indispensable player, offering tools and solutions that automate and optimize the design process. The company’s software is integral to developing semiconductors, providing solutions for everything from logic synthesis to physical layout, ensuring chips are not only functional but also power-efficient and reliable. Synopsys has also expanded its reach into semiconductor IP, offering pre-verified blocks that chipmakers can integrate into their designs, a strategy that accelerates development and minimizes risks.
Founded in 1986, Synopsys quickly made its mark with the introduction of its groundbreaking logic synthesis tool, allowing engineers to focus on high-level chip design while leaving the low-level translation to the software. As the semiconductor industry transitioned to a fabless model, Synopsys thrived by providing third-party EDA software to companies that outsourced fabrication to foundries like TSMC. Over time, Synopsys’ offerings have become indispensable to semiconductor companies, with its tools supporting the design of chips used in everything from consumer electronics to cutting-edge AI technologies. This transition also coincided with a shift from license-based pricing to subscription-based pricing, helping Synopsys secure a 95% customer retention rate.
The company’s market dominance is underpinned by high barriers to entry, such as the immense R&D costs, proven compatibility with customer products, and the need for industry-standard compliance. Its solutions have been refined over decades, and the sheer scale of its software makes it difficult for competitors to catch up. Startups face enormous challenges breaking into this space, spending years simply to match the incumbents’ feature set. This entrenched position gives Synopsys significant pricing power, leading to consistent high returns on invested capital (ROIC).
In recent years, the accelerating demand for AI and the rise of chiplet architectures have presented new opportunities for Synopsys. As chips become more complex, with multiple interconnected die in a single package, Synopsys’ extensive IP portfolio becomes even more crucial. Its tools are uniquely suited to handle the complexities of chiplet designs, further cementing its leadership in the EDA space. The company’s success is also driven by its strong relationships with top semiconductor companies, including Nvidia and AMD, who rely on Synopsys’ software to design and simulate the chips before manufacturing.
Synopsys is well-positioned to continue benefiting from the surging demand for semiconductor solutions as AI, cloud computing, and the Internet of Things (IoT) fuel further growth in the semiconductor sector. With its market-leading position, deep technical expertise, and significant recurring revenue base, Synopsys remains a critical enabler of chip design innovation. Its ability to deliver advanced tools and semiconductor IP, combined with its solid customer retention, makes it a key player in the ongoing evolution of the semiconductor industry.
Synopsys, Inc. (SNPS) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 53 hedge fund portfolios held SNPS at the end of the third quarter which was 53 in the previous quarter. While we acknowledge the risk and potential of SNPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SNPS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.