Bank Of America Sees Upside Potential In Synopsys, Highlights Encouraging Sales Trends

Chip and electronic design automation (EDA) supplier Synopsys, Inc. SNPS boasts a strong leadership position that should help it grow faster than its peers, according to Bank of America.

The Analyst

Bank of America analyst Adam Gonzalez resumed coverage of Synopsys with a Buy rating and $171 price target.

The Thesis

Synopsys has grown its core sales at an 8% compounded annual growth rate since 2013 and the company's exposure to encouraging secular trends like artificial intelligence, 5G and autonomous driving should help EDA sales grow at a 5% to 10% CAGR rate moving forward, Gonzalez wrote in a note.

The company's growth outlook is superior compared to semiconductor R&D companies and coupled with double-digit earnings and free cash flow growth, the stock's 10% to 20% valuation gap versus its peers should narrow, the analyst wrote.

Synopsys' also boasts a 90% recurring revenue model which "mutes cyclicality," the analyst wrote. Also, a slowdown in Moore's law suggests more complex chip designers will benefit from greater demand for integrated EDA tools and IP blocks.

The company's exposure to semis IP and the enterprise software security (SIG) market should add another layer of growth. Specifically, an expanding leadership position in the two areas should enhance overall growth by 200 to 300 basis points while having no impact on a potential 500 basis point operating margin expansion.

Price Action

Shares of Synopsys were trading higher by 0.7% Monday afternoon at $136.68.

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