Chip design software firm Synopsys is benefiting from a surge of design activity around semiconductors for artificial intelligence applications. But SNPS stock so far has not benefited.
Synopsys last Wednesday beat estimates for its fiscal first quarter and gave mostly in-line guidance for the current period. SNPS stock fell after the report, continuing a downward slide that began in late January.
Customer activity in AI and high-performance computing was "robust" in fiscal Q1, but industrial, automotive and consumer electronics segments "remained challenged," Chief Executive Sassine Ghazi said on a Feb. 26 conference call with analysts.
"Despite this tale of two markets, along with headwinds in China as we anticipated, Synopsys opportunity is tied to R&D and underpinned by the megatrends of AI, silicon proliferation and software-defined systems," Ghazi said.
Synopsys expects advancements in AI to improve its design flow for developing new chips.
"We see a paradigm shift coming with agentic AI, where engineers can task autonomous agents with executing complex workflows," Ghazi said. "We believe this will be massive value and productivity unlock for our industry, which we'll talk more about at our Synopsys User Group Conference in March."
Possible SNPS Stock Catalysts
The annual conference, known as SNUG, is scheduled for March 19-20 in Santa Clara, Calif. It could provide the next catalyst for SNPS stock.
Another potential catalyst for Synopsys stock could be the closing of its acquisition of Ansys, expected by midyear. Synopsys announced the $35 billion deal in January 2024.
On the stock market today, SNPS stock fell 3.1% to close at 443.26. Synopsys stock is now at its lowest level since September 2023.
"We're seeing strength in the AI part of the market," Chief Financial Officer Shelagh Glaser told Investor's Business Daily. "That's translating into more chip designs and more starts in chip designs, which is, of course, what we're indexed to."
Interface Technology Is Critical
The AI boom has meant more demand for the company's latest and greatest software tools as well as its intellectual property in interface technology, she said.
"The pace is breakneck in the AI space," Glaser said. "We're indexed to the R&D engineers, not really indexed to the volumes in the market. We're building the tools to enable them to deal with this incredible pace."
The pace of change has been particularly fast in interface technology, she said. Interfaces connect processors to memory chips and other computer system components.
"Those interfaces need to be able to keep up with that intense compute need," Glaser said. "In the olden days, the PC set the pace of interfaces, then the (mobile) phone set the pace of interfaces. Now it's very much AI that sets the pace."
She added, "It used to be that some (interface) standards would last for four years. But we've seen some of these standards move in less than two years just because that workload is so intensive."
Synopsys Stock Is A Long-Term Leader
In its fiscal first quarter ended Jan. 31, Synopsys earned an adjusted $3.03 a share on sales of $1.46 billion, topping views. But on a year-over-year basis, Synopsys earnings fell 10% while sales declined 4%.
The Sunnyvale, Calif.-based company reaffirmed its full-year fiscal 2025 guidance. It is targeting adjusted earnings of $14.92 a share on revenue of $6.78 billion, based on the midpoint of its outlook. That would translate to year-over-year growth of 13% in earnings and 11% in revenue.
JPMorgan analyst Harlan Sur rates SNPS stock as overweight with a price target of 685.
"Overall, the fundamental backdrop remains solid, with continued strong activity in AI/leading-edge chip designs and an incremental improvement in the consumer/mobile markets, which offsets deteriorating revenue trends in China and sluggish trends in the auto/industrial sectors," Sur said in a client note Thursday.
SNPS stock is in the IBD Long-Term Leaders Portfolio.
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