Software stocks which fall under the broader tech sector, have been under pressure since last year due to the Fed’s aggressive interest rate hikes. The Fed announced its 10^th interest rate hike of 25 basis points last week, and the Federal Open Market Committee had hinted it could pause rate hikes if inflation showed further signs of easing.

The latest CPI data for April indicated that inflation moderated as the consumer price index (CPI) increased 0.4% for the month, in line with estimates, and rose 4.9% annually, slightly lesser than the 5% estimate. This could be good news for tech stocks.

Amid this backdrop, it could be wise to buy software stock Synopsys, Inc. (SNPS - Get Rating). Given its strong growth prospects, it could outperform in a bear market.

In this piece, I have discussed several reasons why it could be wise to buy the stock.

SNPS delivered a solid performance in its first quarter. The company’s EPS and revenue exceeded analyst estimates in the first quarter. Its EPS beat analyst estimates by 5.4%, while its revenue came 0.3% above the consensus estimate. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

SNPS’ Chair and CEO Aart de Geus said, “Synopsys delivered a solid start to the year. Building on our strength and momentum from 2022, we met or exceeded all of our guidance targets, and based on the continued robust design activity, we remain confident in our business.”

For the second quarter, the company expects its revenue to come between $1.36 billion and $1.39 billion and revenues of between $5.78 billion and $5.83 billion for the fiscal year ending October 31, 2023. It expects its non-GAAP EPS for the second quarter to come between $2.45 and $2.50, while its non-GAAP EPS for fiscal 2023 is likely to come between $10.53 and $10.60.

For the whole year, the company expects its operating cash flow to be approximately 1.65 billion.

“As a key technology catalyst in the ‘Smart Everything’ world, we are driving groundbreaking innovations that radically advance the design of complex chips and software. For FY’23, we are reaffirming our targets of 14-15% revenue growth and continued non-GAAP operating margin expansion, and expect to grow non-GAAP earnings per share by 18-19%,” de Geus added.

The stock has gained 16.1% in price over the past six months and 36.8% over the past year to close its last trading session at $370.12. The software market is expected to remain resilient amid the recessionary pressures, reaching a market volume of $858.10 billion by 2028, growing at a compounded annual growth rate (CAGR) of 5.4%.

Here are some factors that could influence SNPS’ performance in the upcoming months:

Robust Financials

For the fiscal first quarter that ended January 31, 2023, SNPS’ total revenue increased 7.2% year-over-year to $1.36 billion. The company’s non-GAAP net income increased 7.9% from the year-ago period to $406.67 million. In addition, its non-GAAP net EPS came in at $2.62, representing a 9.2% increase from the prior-year quarter.

Strong Historical Growth

SNPS’ revenue grew at a CAGR of 15.3% over the past three years. Its EBIT grew at a CAGR of 29.2% over the past three years. In addition, its EPS grew at a CAGR of 24.8% in the same time frame.

High Profitability

In terms of the trailing-12-month EBIT margin, SNPS’ 21.50% is 369.5% higher than the 4.58% industry average. Its 18.22% trailing-12-month net income margin is 661.9% higher than the 2.39% industry average. Likewise, its 17.10% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.04%.

Positive Analyst Estimates

Analysts expect SNPS’ revenue for fiscal 2023 and 2024 to increase 14.1% and 12.1% year-over-year to $5.80 billion and $6.50 billion. Its EPS for fiscal 2023 and 2024 is expected to increase 18.9% and 14% year-over-year to $10.58 and $12.06.

SNPS’ EPS for the quarter ending July 31, 2023, is expected to increase 27.7% year-over-year to $2.68. Its revenue for the quarter ended April 30, 2023, is expected to increase 8.3% year-over-year to $1.38 billion.

POWR Ratings Show Promise

SNPS has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SNPS has an A grade for Quality, consistent with its high profitability.

It has a B for Sentiment, in sync with its favorable analyst estimates. Also, its 1.18 beta justifies its B grade for Stability.

Within the Software – Application industry, SNPS is ranked #23 out of 135 stocks. Click here to access SNPS ratings for Growth, Value, and Momentum.

Bottom Line

SNPS’ stock is trading above its 10-day and 200-day moving averages of $369.52 and $342.94, respectively, indicating an uptrend. The company reported solid growth in revenue and earnings in the first quarter. Despite fears of a recession later this year, the company reaffirmed its growth targets for fiscal 2023.

Given its robust financials, strong historical growth, favorable analyst estimates, and high profitability, it could be wise to buy the stock now.

How Does Synopsys, Inc. (SNPS) Stack up Against Its Peers?

SNPS has an overall POWR Rating of B. Check out these other stocks within the Software – Application industry with A (Strong Buy) or B (Buy) ratings: eGain Corporation (EGAN - Get Rating), Commvault Systems, Inc. (CVLT - Get Rating), and Karooooo Ltd. (KARO - Get Rating).

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SNPS shares were trading at $368.85 per share on Thursday afternoon, down $1.27 (-0.34%). Year-to-date, SNPS has gained 15.52%, versus a 8.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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