This stock got caught up in the software sell-off. Stephanie Link says it's the perfect time to buy
Key points: Synopsys shares are very cheap compared to its biggest competitor after a sell-off in software stocks this year The electronic design automation software leader holds a 41% market share. Nvidia is buying shares of the stock, alongside the company itself. I am a buyer of Synopsys (SNPS) , a casualty of the recent software meltdown. The selling is overdone when considering its leading market position, software contract backlog and cheap valuation. Synopsys makes electronic design automation (EDA) software for creating complex silicon chips and transistors used in everything from data centers to automobiles. It’s customers include Nvidia and Tesla. The more complex the chips, the more you need Synopsys because it allows customers to get to market faster with greater accuracy. That’s why they call what Synopsys makes “mission critical software.” Synopsys was founded 40 years ago in North Carolina by semiconductor industry pioneer Aart de Geus. The company eventually moved to Silicon Valley, establishing the Electronic Design Automation market and going public in 1992. De Gues passed the CEO baton to Sassine Ghazi three years ago and became executive chair. Over the last 20 years, the stock has returned nearly 16% annually, topping the S & P 500’s 11% return. But the shares have hit some turbulence recently. AI threat The shares are down more than 32% from a one-year high, including a 7% pullback this year alone as it gets caught up in the software rout based on fears artificial intelligence will replace some of the industry’s functions. A proxy for the industry’s sell-off — the iShares Expanded Tech-Software ETF (IGV) — is down 18% this year, led by companies such as TurboTax maker Intuit and HR software provider Workday. Share of those two companies have each lost nearly a third of their value on the fear tools by Anthropic’s Claude or other AI models will replace their business. Even Microsoft has not been immune, with the shares down 16% this year on the possible threat to its Office suite of products from AI. But Synopsys won’t so easily be replaced because of the complexity of its software. And it will ride the AI wave in many ways, rather than be dragged under by it: The company allows its customers to design AI-powered systems. Hyperscalers fueling the AI boom are Synopsys customers. AI calls for more and more sophisticated chip designs, increasing demand for Synopsys. The stock’s losses continued last week even as Synopsys’ quarterly earnings easily topped Wall Street estimates. Ghazi dismissed concerns that Synopsys could be displaced by an AI model on last week’s earnings call. “Synopsys’ decades of deep domain expertise, proprietary codebases and solvers and native foundry design technology co-optimizations deliver optimal, deterministic, silicon-proven results that probabilistic AI models do not replicate,” said the CEO. Ghazi said AI will transform the engineering software business, but Synopsys is leading that charge. The company also raised its earnings guidance for the full year to a range of $14.38 to $14.46 a share, up from $14.32 to $14.40 a share. Ghazi noted that forecast is achievable as the “multitrillion-dollar AI infrastructure buildout continues unabated” while acknowledging some “subdued” demand from consumer, automotive and industrial markets.” Leading the market The company has a leading market share position in the EDA industry and that’s not likely to change because 70% of its revenue is recurring and it just reported 43% growth in its contract backlog. A key acquisition last year of Ansys, a company that allows real world simulation of systems, will increase the its total addressable market from $31 billion to $58 billion by 2028. The company believes this purchase makes them the ultimate the “silicon to systems” leader. With the Ansys purchase, Synopsys has taken its total market share of the EDA market to 41%. Valuation Following this sell-off, the stock now trades at a major multiple discount to its largest peer, which is Cadence Design Systems . And Nvidia isn’t just a customer, it’s also an owner of Synopsys. The AI leader bought a $2 billion stake in the software maker last quarter, making it the company’s third largest outside equity holding. Synopsys itself is also buying its shares. The company’s board last week approved a “replenishment” of its stock repurchase program with authority to buy up to $2 billion shares. Wall Street’s view Overall, Wall Street analysts are supportive of the stock with 19 buy ratings, 5 hold ratings and just one sell. The current consensus price target calls for a 25% rally from here. Morgan Stanley downgraded the stock to hold last week — which also hit the stock — because it is worried about its core EDA business slowing and uncertainty about AI’s impact. But even after the downgrade, the firm sees about a 10% gain over the next 12 months for the stock, based on its price target. So I’m a buyer and I’ll continue to buy on any more weakness. Past Stephanie Link picks: Starbucks – Stephanie Link is buying shares of this turnaround story. The comeback could become clear this week SLB – Stephanie Link says this oil stock is cheap and poised to benefit from the data center boom
