Synopsys Should Benefit No Matter Who Wins The AI Race. Here's What Explains Its Poor Stock Performance.

Synopsys (SNPS) sits in a rare spot in the chip world. The company makes the software that engineers use to design semiconductors, and you cannot build a modern chip without it. So it doesn't matter which company wins the AI race. Whether it's Nvidia (NVDA), Apple (AAPL), or any other chipmaker, they all need these design tools to get there. Synopsys is the largest supplier of them.

That is a strong position to be in. The company's tools are difficult to replace, which is why most of its revenue is recurring and reliable. Companies have built their entire design process around them over many years. This makes switching to a rival firm slow, costly, and risky.

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Yet the company's investors find themselves in a different story. In its last quarterly report, Synopsys raised its guidance for the year, but the share price still fell around 9% in the days after and is down over 20% year-to-date (YTD). The CEO stated that the solid execution and strong AI-driven demand helped Synopsys exceed its revenue and non-GAAP EPS. Despite this, the stock price took a hit as investors were concerned about the company still being $10 billion in debt after the Ansys acquisition. Excluding Ansys, the organic growth also remained slow due to weak demand in China and a revamp of its chip IP business. The performance was strong overall, but the stock had already climbed a long way, leaving little room for anything short of perfect.

Synopsys is a Sunnyvale, California-based company that delivers design IP solutions used by semiconductor and electronics companies to test and design chips. The company operates through Design IP and Design Automation. It offers Digital and Custom IC Design solutions, Verification solutions, FPGA design products, and AI-driven EDA solutions.

SNPS stock delivered a weak performance over the last 12 months, being approximately 36% down. In contrast, the iShares Semiconductor ETF (SOXX) generated exceptional gains of around 106% during the same timeframe. While the broader semiconductor industry posted strong returns, the stock failed to match the ETF's rally and clearly underperformed the sector's performance. A similar pattern was seen this year, as the ETF continued to outperform SNPS.

Synopsys is challenging to value on earnings right now. The forward GAAP price-to-earnings (P/E) of 157.39x sits 119% above the company's 5-year average of 72.00x. This looks like an extraordinary premium to its historical norms. But the number is misleading, as the Ansys acquisition has burdened the company with restructuring and debt costs. This has temporarily depressed the reported earnings and inflated the P/E. The forward price-to-sales (P/S) ratio of 8.43x tells a cleaner story, sitting 25% below the 5-year average of 11.16x, which suggests the stock is actually cheaper than its norm.

EPS growth trajectory is steady, with an increase of 11% to 18% estimated through 2029. The capital structure explains the investors' concerns. Synopsys holds just $2.48 billion in cash against $10.84 billion in debt. The debt is primarily due to the Ansys deal. The company, though, has a reliable cash flow and has been paying the debt down quickly. Once the acquisition costs fade, the gap between Synopsys' P/E and P/S should start to close.

Synopsys posted its second-quarter fiscal 2026 results on May 27, reporting quarterly revenue of $2.276 billion. This includes approximately $652 million in revenue from Ansys. On the earnings front, GAAP EPS came in at $0.09. At the end of the quarter, the company had $2.48 billion in cash and short-term investments. However, total debt stood at over $10 billion.

Going forward, management raised its full fiscal year 2026 earnings, revenue, operating margin, and free cash flow guidance. Synopsys now expects fiscal 2026 revenue to range from $9.625 billion to $9.705 billion. Non-GAAP EPS is projected between $14.72 and $14.80 per share. For the third quarter, revenue is forecasted between $2.41 billion and $2.46 billion. Non-GAAP EPS for the quarter is estimated to be $3.63 to $3.69 per share.

SNPS stock's most recent upward price target revision from a Wall Street analyst came from Piper Sandler on June 23, which raised its price target from $450 to $550. The stock currently carries a consensus "Strong Buy" rating from the 20 Wall Street analysts covering it. Based on their estimates, it has an average price target of $567.57, reflecting an additional 53% upside from the current levels. Additionally, the highest price target of $650 suggests around 75% upside from here on.

On the date of publication, Jabran Kundi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com

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