This Large Cap Tech Stock Has 'Buy' Rating From Various Analysts Recently On Potential Upside - Here's Why

Piper Sandler analyst Clarke Jeffries initiated coverage on Synopsys Inc SNPS with an Overweight rating and a price target of $665.

The analyst noted that from solid hyperscaler and data center activity, Synopsys has seen a substantial improvement in metrics over the past four years, growing at 15% CAGR and expanding operating margins by 1000bps since 2019. 

Two transformative transactions could line up Synopsys for further margin expansion, including the acquisition of margin accretive ANSYS, Inc ANSS with hundreds of millions in potential synergies in the years following the close and the sale of the Software Integrity Group (SIG), as over 90% of the margin expansion in the last three years has come from the Semiconductor & System Design group, not SIG, as per Jeffries. 

While the integration of Ansys & the horizon for potential synergies create higher execution risk, he noted the sale of SIG will be a positive catalyst that reorients the conversation on core margin expansion soon. 

More so than its competition, Synopsys has substantially invested in building a diverse product portfolio of semiconductor and system design tools, including becoming the largest provider of non-processor semiconductor IP (25% of revenue), which are design tools for reusable building blocks in chip design like memory, storage, I/O interfaces, Jeffries said. 

With chips and systems seeing disaggregation with multi-die and multi-chiplet, Synopsys should be well positioned to address a longer tail of future designs as the proliferation of electronics in products continues, the analyst said.

While diversification into SIG, systems design & design IP helped Synopsys grow double digits over the last decade, 12% CAGR, margin expansion from 2013 to 2019 was minimal (+100bps) even as revenue rose from $2 billion to $3.3 billion over the same period, he flagged.

However, in recent years, the story has changed. Jeffries said that Synopsys has seen a substantial acceleration in growth and operating margin expansion since 2019, with a 15% revenue CAGR and 1000bps of operating margin expansion. 

This helped propel SNPS to being one of the best-performing software stocks over the last five years, with ~400% return vs. ~80% average return across Cloud stocks.

Jeffries projected second-quarter revenue and EPS of $1.44 billion and $2.93.

Synopsys stock gained 53% in the last 12 months. Investors can gain exposure to the stock via ProShares Nasdaq-100 Dorsey Wright Momentum ETF QQQA and Themes Cloud Computing ETF CLOD.

Last week, Needham reiterated a buy rating on Synopsys with a $660 price target. Check out more bullish ratings by various analysts on SNPS.

Price Action: SNPS shares are trading higher by 1.91% to $589.91 on the last check Thursday.

Also Read: Synopsys Hits Record Backlog In Q4, Analysts Elevate Price Targets Citing Fundamental Strength

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