Synopsys Is A Software Company Trading At Semiconductor Valuations

Credit Suisse has started coverage of Synopsys, Inc. SNPS with an Outperform rating and $68 price target, as it expects the company to benefit from the shift of semi growth from consumer to IAI/IoT.

Analyst Farhan Ahmad estimates Synopsys gets about 1 percent of semiconductor revenues from IAI/IoT versus 0.25 percent of consumer semiconductor revenues. This assumes significance as once the semi growth shifts toward IoT/IAI, it would enable Core EDA, such as Synopsys, to grow faster than semis.

Further, the analyst noted that the company gets 25 percent of its revenues from Semi IP, which is growing at a 10 percent plus CAGR, enabling the company to grow 2 points above the EDA industry. Ahmad expects the company to continue increasing its market share in EDA space.

Related Link: Increased Industry Attention A Positive For Synopsys

“We estimate a revenue growth CAGR for SNPS at 3–4 pts above Semis and ~1–2 pts above EDA peers,” Ahmad wrote in a note.

In addition, the company gets 21 percent of its revenue from Systems IP and Software testing businesses, which are growing at a >10 percent/>20 percent CAGR, respectively.

The analyst projects these businesses to add about two points to growth CAGR on top of the Core EDA growth of 3–4 percent. As a result, Ahmad expects for Synopsys to grow revenues at 5.5 percent over the coming five years.

Moreover, the analyst expects differentiated products would help Synopsys to modestly improve its operating margin to 25 percent by FY17 versus 22 percent in CY15.

“We see revenue growth accelerating to 7+ percent from 2018, following 5–6 percent revenue growth in 2015-17, as growth from Systems companies and China Fabless offsets the impact of Semi M&As,” Ahmad added.

Shares of Synopsys were down 0.22 percent on Tuesday to close the day’s trading at $59.62.

Full ratings data available on Benzinga Pro.