The Electronic Design Automation (EDA) firm Synopsys, Inc. (SNPS - Get Rating) is set to unveil its fiscal fourth-quarter financial results on November 29. Analysts project earnings of $3.03 per share, a robust 58.9% surge from the prior year, and anticipate $1.58 billion in revenue, reflecting a substantial 23.4% year-over-year growth.

Before delving into SNPS’ fundamentals, let’s scrutinize recent developments shaping the company’s future trajectory.

On November 15, SNPS announced a groundbreaking advance in chip design acceleration—Synopsys.ai Copilot. This GenAI breakthrough results from a strategic alliance with Microsoft Corporation (MSFT - Get Rating), seamlessly integrating Azure OpenAI Service to confront the complexities of engineering’s most intricate challenges.

In this collaboration, SNPS and MSFT propel AI-driven design to unparalleled heights. Synopsys.ai Copilot introduces potent generative capabilities, including conversational intelligence, marking a paradigm shift in chip design. This positions SNPS as a pioneer at the forefront of innovation in the semiconductor industry.

Furthermore, on October 17, SNPS announced an expanded collaboration with Arm Holdings plc (ARM), focusing on delivering optimized IP and EDA solutions for the latest Arm® technology, encompassing the Arm Neoverse™ V2 platform and Arm Neoverse Compute Subsystem (CSS).

Joining Arm Total Design, SNPS is leveraging its extensive design expertise, the Synopsys.ai™ full-stack AI-driven EDA suite, and Synopsys Interface, Security, and Silicon Lifecycle Management IP. This positions SNPS to tap into a lucrative market, accelerating the development of ARM-based CSS solutions for mutual customers.

Shares of SNPS have gained 19.2% over the past month and 70% year-to-date to close the last trading session at $543.53.

Here are the financial aspects of SNPS that could influence its performance in the near term:

Robust Financials

For the fiscal third quarter that ended July 31, 2023, SNPS’ revenue increased 19.2% year-over-year to $1.49 billion. Its operating income rose 26.3% from the year-ago value to $295.47 million.

In addition, non-GAAP net income and non-GAAP net income per share attributed to SNPS grew 36.2% and 37.1% from the prior year’s period to $445.88 million and $2.88, respectively.

Sound Historical Growth

Over the past three years, SNPS’ revenue and EBITDA increased at 16.3% and 19.6% CAGR, respectively. Its net income and total assets grew at 18.1% and 9% CAGR, respectively. In addition, the company’s levered free cash flow rose at a 23.5% CAGR over the same time frame.

Positive Analyst Estimates

The consensus revenue estimate of $5.83 billion for the fiscal year ended October 2023 reflects a 14.6% year-over-year improvement. Likewise, the consensus EPS estimate of $11.10 for the same year exhibits a 24.7% rise from the previous year. Furthermore, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Robust Profitability

SNPS’ trailing-12-month gross profit margin of 80.14% is 64.7% higher than the industry average of 48.67%. Its trailing-12-month EBITDA margin of 23.48% is 159.1% higher than the 9.07% industry average. Also, the stock’s net income margin of 18.71% compares to the 1.77% industry average.

Additionally, SNPS’ trailing-12-month ROCE, ROTC, and ROTA of 17.89%, 10.90%, and 10.42% compare to the industry averages of 0.80%, 2.60%, and 0.07%, respectively. Furthermore, the company’s trailing-12-month levered FCF margin of 27.03% is 229.6% higher than the industry average of 8.20%.

POWR Ratings Show Promise

SNPS’ robust outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different 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, justified by its higher-than-industry profitability. Moreover, the stock has a B grade for Growth, consistent with its solid past growth record.

SNPS is ranked #15 in the 132-stock Software – Application industry. Click here to access SNPS’ Value, Momentum, Stability, and Sentiment ratings.

Bottom Line

The groundbreaking advances in chip design acceleration, highlighted by SNPS’ collaboration with MSFT and the expanded partnership with ARM, position SNPS for significant growth by leveraging cutting-edge technology and strategic alliances in the semiconductor industry.

Moreover, an optimistic analyst’s projection, robust profitability, and solid financials underscore a favorable outlook. This suggests a wise move to consider a buy stance in anticipation of SNPS’ forthcoming earnings release.

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

While SNPS has an overall grade of B, equating to a Buy rating, you may also check out these other A-rated stocks within the Software – Application industry: SAP SE (SAP - Get Rating), Yalla Group Limited (YALA - Get Rating), and Karooooo Ltd. (KARO - Get Rating). For exploring more A-rated Software – Application stocks, click here.

What To Do Next?

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SNPS shares were trading at $542.03 per share on Tuesday afternoon, down $1.50 (-0.28%). Year-to-date, SNPS has gained 69.76%, versus a 20.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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