Since the beginning of the year, the stock market has been quite volatile due to concerns over surging inflation, a war in Eastern Europe, rising energy prices, supply chain disruption, and aggressive monetary policy tightening. However, the U.S. added 431,000 jobs in March, bringing the unemployment rate to 3.6%. Moreover, According to data from FactSet, 7% of S&P 500 companies have reported first-quarter results so far, with 77% of them topping EPS expectations. So, growth-based companies with solid fundamentals and robust growth prospects could generate market-beating returns in the long run, dodging short-term fluctuations. Therefore, both Synopsys, Inc. (SNPS) and Adobe Inc. (ADBE) should benefit.
SNPS provides electronic design automation software products used to design and test integrated circuits. Its offerings include Fusion Design Platform, Verification Continuum Platform, and FPGA design products. ADBE operates as a diversified software company worldwide. It operates through three segments: Digital Media, Digital Experience, and Publishing and Advertising.
SNPS has lost 19% year-to-date and ADBE is down 25% during that same time period. Which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On March 30, 2022, SNPS announced a new cloud-optimized electronic design automation deployment model that delivers unparalleled levels of chip and system design flexibility via a single-source, pay-as-you-go approach to drive significantly greater productivity and efficiency for increasingly complex chip designs.
On March 22, 2022, Dan Durn, executive vice president and CFO of ADBE, said, "Our momentum, product innovation and immense market opportunity position us for success in 2022 and beyond."
Recent Financial Results
SNPS’ revenue increased 30.9% year-over-year to $1.27 billion for the fiscal first quarter ended January 31, 2022. The company’s non-GAAP net income came in at $376.90 million, representing a 57.4% year-over-year increase. Also, its non-GAAP EPS came in at $2.40, up 57.9% year-over-year.
ADBE’s revenues increased 9.1% year-over-year to $4.26 billion for the fiscal first quarter ended March 4, 2022. The company’s non-GAAP net income came in at $1.60 billion, representing a 5.7% year-over-year increase. Also, its non-GAAP EPS came in at $3.37, up 7.3% year-over-year.
Past and Expected Financial Performance
SNPS’ EBITDA and levered FCF grew at CAGRs of 27% and 102.5%, respectively, over the past three years. Analysts expect SNPS’ revenue to increase 14.4% in the current year and 11.4% next year. The company’s EPS is expected to grow 15.5% in the current year and 15.6% next year. Moreover, its EPS is expected to grow at 16.2% per annum over the next five years.
On the other hand, ADBE’s EBITDA and levered FCF grew at CAGRs of 25.6% over the past three years. The company’s revenue is expected to increase 13.1% in the current year and 14.7% next year. Its EPS is expected to grow 9.5% in the current year and 17.9% next year. Also, ADBE’s EPS is expected to increase at 14.3% per annum over the next five years.
Profitability
ADBE’s trailing-12-month revenue is 3.59 times what SNPS generates. ADBE is also more profitable, with a gross profit margin and net income margin of 88.04% and 29.90% compared to SNPS’ 80.89% and 20.18%, respectively
Furthermore, ADBE’s ROE, ROA, and ROTC of 35.34%, 14.54%, and 20.19% are higher than SNPS’ 17.66%, 7.23%, and 10.62%, respectively.
Valuation
In terms of trailing-12-month EV/S, ADBE is currently trading at 11.13x, 20.2% higher than SNPS’ 9.26x. However, SNPS’ trailing-12-month EV/EBITDA ratio of 26.33x is 17% higher than ADBE’s 22.50x.
POWR Ratings
SNPS has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, ADBE has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
SNPS has a B grade for Growth and Sentiment. On the other hand, ADBE has a C grade for Growth and Sentiment.
Of the 159 stocks in the Software - Application industry, SNPS is ranked #7. In comparison, ADBE is ranked #39.
Beyond what I’ve stated above, we have also rated the stocks for Quality, Value, Momentum, and Stability. Click here to view all the SNPS ratings. Also, get all the ADBE ratings here.
The Winner
The reopening economy has been driving the growth prospects of many companies. While both SNPS and ADBE are expected to gain, it is better to bet on SNPS now because of its better financials.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here.
ADBE shares were trading at $434.40 per share on Tuesday afternoon, up $8.93 (+2.10%). Year-to-date, ADBE has declined -23.39%, versus a -6.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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