Synopsys Stock: IoT and Big Data Can Drive Revenue Growth (NASDAQ:SNPS)

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Synopsis (NASDAQ:SNPS) is a long-term growth story in the chip design space. Its technology is used in the design of modern chips that continue to drive long-term revenue growth at a CAGR of around high single digits. Its Internet of Things (IoT) and big data products enjoy a significant competitive advantage over products developed by other chip design software vendors. Long-term investors can buy shares of the company at the current price for significant gains. me published an article about Synopsys in early January 2020. Since then, the stock has risen significantly. I think we should now take a new look at stocks and therefore I am writing the current article.

Synopsys is a world leader in providing electronic design automation (EDA) software. Chip designers use software to design and test integrated circuits (ICs). The company also offers semiconductor intellectual property (IP) products, which are pre-engineered circuits used in the chip design process. The company’s customers use its technologies in the process of designing chips for low power, as well as reliability, mobility, and security built into modern, sophisticated chips.

growth controllers

IoT Related EDA Products

Synopsys’ main growth driver is the growing IoT market. The company’s EDA products are developed with IoT-related semiconductor chips in mind. Chip designers use the company’s EDA products to automate the chip design process and reduce errors, leading to more powerful and robust designs. The advent of AI (artificial intelligence) and ML (machine learning) is also driving demand for the company’s IoT-related EDA products. With the expansion of cloud-based data storage, the demand for cloud EDA products is increasing. Synopsys cloud-based EDA products for IoT offer customers scalability and flexibility, as a result of which the company’s EDA products outperform competing products. I believe the company’s IoT-related EDA products could continue to drive long-term revenue growth on a sustainable basis.

Big Data market and analysis

Another growth driver for Synopsys is the big data and analytics market. After collection, big data is transmitted over wired or wireless data networks, which is then processed in data centers and analyzed by data center analytics. For big data processing and analysis, GPUs and FPGAs are required, which have a lot of processing power for their huge parallel processing capabilities. The EDA and IP products developed by Synopsys can be used to design and test GPUs and FPGAs, also known as data center accelerators. according to a report:

The global data center accelerator market size is projected to grow from $13.7 billion in 2021 to $65.3 billion by 2026; it is expected to grow at a CAGR of 36.7% from 2021 to 2026.

The expected growth of the data center accelerator market at a significant rate could significantly drive Synopsys’ long-term revenue growth.

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Competition

The field where Synopsys operates is highly competitive. The company’s competitors include Cadence Design Systems (CDNS), Siemens EDA (formerly Mentor Graphics Corporation) (OTCPK:SIEGY), Keysight Technologies (KEYS), Checkmarx Ltd., Veracode (now part of Thoma Bravo), and Micro Focus International ( MFGP). Synopsys competes with these companies on the basis of product quality, product ease of use, and customer service.

Synopsys’ main competitive advantage is that its Silicon to Software technology leads to increased designer productivity and efficiency by automating tasks. The technology also helps designers by adding intelligence to the design process and reducing errors. The company’s other competitive advantage is that it has remarkable digital and custom integrated circuit design capabilities. Its Fusion design platform for this purpose comes with innovative technologies, a common foundation, and flexibility. The platform helps customers reduce design time and risk, and reduce uncertainties in the design steps. As a result, the product enjoys strong demand and outperforms competing products. Both competitive advantages help Synopsys to strengthen the long-term revenue generation process.

Fiscal Year 2022 Third Quarter Results

The company’s fiscal 2022 third quarter revenue was $1.248 billion, compared to $1.057 billion in the same period a year earlier, an 18% year-over-year increase. The company’s non-GAAP net income for the quarter was $327.4 million, or $2.10 per diluted share, compared to $284.5 million, or $1.81 per diluted share in the same period. last year. Non-GAAP EPS increased 16% year over year.

The company delivered impressive results for the third quarter of fiscal 2022. Gross revenue increased fueled by growing investments by the company’s customers in more complex chips, more sophisticated systems and more software. The bottom line increased driven by the company’s strict cost control measures and broad-based strength in the company’s different technology portfolios. Many systems companies in the world, from large hyperscalers to AI startups, have decided to design their own chips and systems to accelerate their differentiation, and Synopsys is successfully helping these companies on their journey to chip and system design. . As a result, Synopsys is benefiting greatly in terms of strong revenue generation.

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The company’s DSO.ai artificial intelligence design solution is a revolutionary design in AI-related chip design. The solution offers outstanding improvements in the productivity of designers and results in a significant reduction in response time and computing resources. I expect DSO.ai to add significantly to the company’s revenue growth in the coming months and years.

Valuation

Synopsys’ sister group companies include Cadence Design Systems, Keysight Technologies, Dassault Systèmes (OTCPK:DASTY), Atlassian Corporation (TEAM), and Roper Technologies (ROP).

SNPS

CDNS

KEYS

DASTY

EQUIPMENT

ROP

Non-GAAP P/E (FY1)

33.29

35.80

23.25

130.78

27.38

Price/Sales (TTM)

9.11

11.98

6.00

8.63

18.62

6.63

Price/Cash Flow (TTM)

26.26

34.71

27.88

28.17

59.45

27.87

(Data source: Looking for Alpha)

Synopsys is fair value compared to its peers. The company has a balance of cash and equivalents of $1,383.6 million and a total debt of $669.1 million. The company’s revenue has grown at a CAGR of 12.68% over the past five years, and I believe revenue will continue to grow at a high single-digit CAGR over the next five years. The company’s IoT and big data products could drive revenue growth over the next five years and support premium valuation over the same time period. By premium valuation I mean 20-30% higher valuation multipliers than the current level. In addition, long-term earnings growth could result in a significant upside for the company’s stock. Long-term investors can buy the shares around the current price.

Assuming Synopsys revenue grows at a CAGR of 9% over the next five years, I’ll find out the long-term (five-year) stock price of the company. The company’s trailing 12-month revenue is $4,949.70 million, and at a 9% CAGR, the company’s revenue at the end of 2027 will be $7,617.00 million, or $49.81 per action. Over the past three years, the company’s shares have traded between the asking price multiples of 5x and 15x. I expect the company’s sales price multiple to hit a high of about 12 times over the next five years driven by long-term (5+ years) demand for the company’s chip design products. Pricing the sales multiple of 12x on Synopsys’ earnings per share at the end of 2027, I get $597.72 as the company’s stock price at the end of 2027.

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If the company’s revenue fails to grow at a CAGR of 9% and grows at a substantially lower rate driven by increasing competition in the EDA and IP market, its stock could underperform over the long term. This is a key risk related to stock valuation. In that case, the valuation multipliers could also be reduced. However, given the company’s brilliant track record for bringing innovative products to market, I expect it to outperform the competition by a wide margin.

risks

A large portion of the company’s revenue comes from the initiation of new design projects by semiconductor manufacturers, systems companies and their customers. The increasing complexity of integrated circuit designs could lead to a decrease in design starts and design activities in the future. As a result, the company’s revenue growth and profitability could be adversely affected.

The industry in which Synopsys operates is characterized by rapid technological changes. To stay relevant, the company has made substantial investments in developing new products as well as improving existing products. However, if the company fails to remain relevant in the future, its revenue growth and profitability could be negatively affected.

conclusion

The company has achieved tremendous revenue growth in the past from its EDA and IP products. I expect the company to continue to generate significant long-term revenue growth, albeit at a slightly slower growth rate due to increased competition in the EDA and IP market. As I said earlier, I expect the company’s long-term revenue to grow at a CAGR of around 9% over the next five years, which, coupled with the expansion of the valuation multiplier, would lead to significant stock price appreciation. long-term shares of the company. Long-term investors can buy shares of the company at around the current price.

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