There’s plenty of reason to be optimistic about Synopsys’ future; however, whether it could realistically make you a millionaire is a much different story.
Electronic design automation (EDA) solutions company Synopsys (SNPS -1.55%) recently completed its long-awaited acquisition of engineering simulation software company Ansys. The deal was completed shortly after the company received the remaining approval it needed (from China) to make the acquisition. It’s an exciting deal that promises to put the new Synopsys ahead of the curve in adopting increasingly complex artificial intelligence (AI)-led product design. That could result in a significant amount of value being generated for shareholders in the future.
Synopsys’ growing end markets
The company’s core activity is EDA, which involves software and hardware that help customers design, verify, and manufacture integrated circuits. As such, its traditional end-market customers are semiconductor and electronics companies. However, that’s only part of the story, because the ever-increasing integration of chips into products and their increasing complexity means Synopsys is selling to industries such as defense, automotive, data centers, consumer electronics, healthcare, and industrial companies, among others.
The integrated circuits/chips are not just systems designed with a fixed and permanent end in mind; they are constantly interacting with their environment and driven by AI-powered interaction.
Consequently, the complexity of integrated circuits/chips is increasing as AI applications place increasing stress on them, driving EDA sales, whether through increased sales to traditional customers (semiconductor companies) or new end-market customers, as outlined above.
How Ansys will boost growth
The Ansys deal not only deepens Synopsys’ relationships with existing customers of both companies but also enhances the value of each company’s solutions by being sold as part of a single entity. This has the potential to accelerate Synopsys’ growth in the new customer bases discussed above.
Ansys makes engineering simulation software used to model how a product will behave in the real world. As such, it currently has a much broader range of customers than Synopsys has at present. However, many of its existing customers are likely to become potential customers for EDA due to the trends discussed previously.
Image source: Getty Images.
Synopsys aims to offer customers a “silicon to systems” solution whereby Synopsys EDA solutions can help design products and Ansys software can analyze their performance. This leads to the potential for engineers to iteratively design a product using EDA and continuously draw on data from Ansys simulation software. This should reduce the development time and cost of a product and improve its quality — a critical requirement at any time, and even more important in an age of increasing complexity.
It’s a powerful combination, and it’s why management believes the acquisition will lead to these long-term objectives:
- Double-digit revenue growth
- Non-GAAP operating margins in the mid-40% range, and long-term free-cash-flow (FCF) margin in the mid-30% range
- Non-GAAP earnings-per-share growth in the high-teens range
Is Synopsys a millionaire-maker stock?
Wall Street analysts have the combined company generating $10.4 billion in revenue in 2026, and conservatively plugging in 10% annual revenue growth for the next decade would take Synopsys to $27 billion in revenue. With a 35% FCF conversion (in line with the assumptions above), the company could generate approximately $9.5 billion in FCF over the next decade. Presuming it continues to grow earnings at a double-digit rate, such a stock could be priced at 25 times FCF — in other words, $238 billion, compared to the current market cap of $113.8 billion.
Image source: Getty Images.
While that provides a decent return over the decade, it’s hardly a millionaire-maker return. That said, making more optimistic assumptions will produce better outcomes (for example, assuming 19% annual revenue growth on the same basis would lead to $518 million in market capitalization).
All told, Synopsys isn’t a stock that will turn ordinary investors into millionaires, but it can produce excellent returns and provides a backdoor way to play the AI spending trend, as well as the explosion in growth in semiconductors embedded in everyday devices.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Synopsys. The Motley Fool has a disclosure policy.
Great Job newsfeedback@fool.com (Lee Samaha) & the Team @ The Motley Fool Source link for sharing this story.
