Synopsys (SNPS) shares have taken a dip recently, currently trading 19.7% below their 52-week high of $629.38, reached on September 30th. Over the past three months, the stock has plunged 16.9%, lagging behind the broader Zacks Computer & Technology Sector’s decline of 1.1% and the Zacks Computer – Software industry’s fall of 2.7%. This pullback has raised some concerns about the company’s future prospects.
Synopsys faces a number of challenges, including rising costs. In the third quarter of fiscal 2024, the company’s cost of revenues and operating expenses increased to $1.17 billion, compared to $1.01 billion in the same period last year. This significant rise has sparked concerns about Synopsys’ ability to effectively manage its expenses. The company also operates in a highly competitive semiconductor and EDA market, which presents another headwind. Furthermore, delays in realizing synergies from recent acquisitions have added to the concerns.
Despite these challenges, Synopsys’ prospects are bolstered by its strong portfolio of innovative products. The shift towards hybrid working models is driving demand for higher bandwidth, a trend that benefits Synopsys’ solutions. The increasing demand for AI, 5G, and IoT technologies also provides a tailwind for the company.
Synopsys reported solid revenues in the third quarter of fiscal 2024, with a 13% year-over-year increase to $1.53 billion, aligning with the Zacks Consensus Estimate. The company anticipates achieving approximately 15% revenue growth for the entire fiscal year 2024, expecting revenues between $6.105 billion and $6.135 billion. The Zacks Consensus Estimate for revenues is pegged at $6.13 billion, indicating a 4.93% year-over-year growth. For fiscal 2024, non-GAAP earnings are expected to range between $13.07 and $13.12 per share. The consensus mark for earnings is pegged at $13.12 per share, unchanged over the past 30 days.
Looking ahead to the fourth quarter of 2024, Synopsys expects revenues between $1.614 billion and $1.644 billion. The Zacks Consensus Estimate for fourth-quarter fiscal 2024 is currently at $3.28 per share, up by a penny over the past 30 days. Non-GAAP earnings are expected to be between $3.27 and $3.32 per share. The consensus mark for fourth-quarter fiscal 2024 revenues is pegged at $1.62 billion, indicating a 1.01% year-over-year growth.
Synopsys has been actively pursuing acquisitions to expand its product portfolio and drive growth. Over the past five years, the company has acquired more than 15 companies, including Intrinsic ID and Valtrix in 2024. Synopsys is currently in the process of acquiring ANSYS (ANSS), a move aimed at strengthening its Silicon to Systems strategy, particularly in sectors like automotive, aerospace, and industrial. This acquisition is expected to expand Synopsys’ customer base and enhance its product offerings.
However, Synopsys’ Design Automation segment experienced slower growth in the third quarter of fiscal 2024. Revenues from this segment increased a modest 6% year over year, reaching $1.06 billion. In comparison, the same segment saw a 23% growth in the third quarter of fiscal 2023, reaching $1.0 billion. This slowdown was attributed to tough competition in the EDA market, where Synopsys competes with major players like Cadence Design Systems (CDNS) and Mentor Graphics. Unfavorable foreign exchange rates and a challenging macroeconomic environment also pose challenges for investors.
Synopsys currently carries a Zacks Rank #3 (Hold), suggesting that investors may want to wait for a more favorable entry point in the stock. Its Value Score of D indicates a stretched valuation at this moment. In terms of forward Price/Earnings, SNPS is currently trading at 34.82X, higher than the broader sector’s 32.33X.
Progress Software (PRGS), a better-ranked stock in the broader sector, sporting a Zacks Rank #1 (Strong Buy), with a long-term earnings growth rate currently pegged at 2%, presents a compelling alternative. Progress Software shares have appreciated 23.2% year to date.
