Wall Street warmed to Synopsys's (SNPS -0.29%) recent investor day presentation, with several analysts promptly hiking price targets, including a Deutsche Bank analyst who maintained a buy rating and raised the target to $640 from $590.
Analysts liked the tech company's growth targets and the multi-year agreement with Amazon.com, which supported its long-term growth aspirations. Are they right to be enthusiastic? I think so, and here's why.
Synopsys is moving to where the AI market is heading
The company's roots lie in electronic design automation (EDA) solutions that help customers -- predominantly semiconductor companies -- design and test chips. That's still a major end market for the company, but chip design is moving beyond traditional semiconductor companies and into a wider range of end-market customers. At the same time, the rapid expansion of physical AI (think autonomous vehicles and robots) is increasing the need for computing power in increasingly complex systems.
NASDAQ: SNPS
Key Data Points
The growth opportunity is encapsulated in the announcement of a $1 billion multi-year agreement with Amazon, whereby the hyperscaler will accelerate its "custom silicon innovation and advance the development of increasingly complex AI-powered products."
Meanwhile, Synopsys continues to integrate its acquisition of the engineering simulation solutions company Ansys as it strives to offer a suite of "silicon-to-systems" solutions to an ever-increasing range of customers. By adding Ansys (systems testing) to its silicon design solutions, Synopsys can let customers design and modify chips while also testing their designs.
Image source: Getty Images.
Growth targets from investor day
These factors combine to create an opportunity for Synopsys to develop what management calls "differentiated silicon tailored to specific workloads and system architectures." It's an opportunity that management sees as leading to the following over the long term:
- Mid-teens revenue growth
- Operating margin of 50% by 2030, compared to about 44% in 2026
- Earnings-per-share growth (EPS) in the mid-20% range
- Free cash flow (FCF) growth in the mid-20% range
Those are pretty aggressive targets, and based on management's guidance for 2026 and 2027, a rough estimate for EPS in 2030 could be $0.37, with FCF of $6 billion. Those estimates would put Synopsys at a price-to-earnings multiple of about 13 and a price-to-FCF multiple of about 15.3 in 2030. These valuations are highly attractive for a company growing at such a rate.
Image source: Getty Images.
Where next for Synopsys?
There's no guarantee that these end markets will grow organically in line with Synopsys' expectations, especially since they rely on assumptions about new market growth and technological adoption that might not unfold as smoothly as management's estimates anticipate.
On the other hand, in-house chip design is growing in response to the increasing complexity and demands of physical AI development. Those trends are powerful, and the customer Synopsys just signed, Amazon, is a great example of the kind of lead customer driving that evolution. All this makes Synopsys an excellent stock option for AI bulls.
