To The Moon

$Synopsys(SNPS)$

Introduction: Why Synopsys is in the Spotlight

After Synopsys (NASDAQ: SNPS) released its most recent quarterly earnings, shares slid sharply, erasing part of the company’s strong multi-year gains. For long-term investors, this sudden drawdown raises important questions: Why did the stock drop so abruptly? Are these risks short-term noise, or a fundamental shift in Synopsys’ business model? And at today’s prices, is Synopsys a buy, a hold, or a sell?

In this article, I’ll walk through Synopsys’ latest performance, highlight what management had to say about current challenges, and analyze the company’s long-term prospects. Most importantly, I’ll share my discounted cash flow (DCF) valuation model and explain why I believe the stock still trades above fair value—even after its recent decline.

Performance Overview and Market Feedback

Synopsys has been one of the standout names in the semiconductor design ecosystem. As a leader in electronic design automation (EDA) and semiconductor intellectual property (IP), the company plays a crucial role in enabling chipmakers and system designers to build next-generation processors.

Over the last decade, Synopsys has consistently delivered double-digit revenue growth, expanding margins, and a strong free cash flow profile. Investors rewarded that performance, sending the stock up more than 400% over the past five years.

However, the most recent quarter brought turbulence. Following earnings, shares fell sharply, reflecting Wall Street’s disappointment over muted guidance for fiscal 2026. Analysts and investors quickly zeroed in on one key issue: China.

Management’s Commentary: A Quarter Defined by Disruptions

On the company’s earnings call, management described the third quarter as one of the most complex in recent history.

• On May 28, Synopsys reported strong second-quarter results.

• On May 29, the U.S. Bureau of Industry and Security (BIS) imposed restrictions on sales to China.

• The restriction lasted for about six weeks, cutting off a key revenue stream.

• During the same quarter, Synopsys completed a transformative acquisition, which included a short “stop period” of about two weeks.

These disruptions collided in a single quarter, making it unusually difficult for Synopsys to maintain growth momentum.

Even after the BIS lifted restrictions, demand did not rebound immediately. That’s because Chinese customers, wary of geopolitical volatility, have begun reducing reliance on U.S. suppliers.

China: From Growth Engine to Drag on Performance

For years, China was one of Synopsys’ fastest-growing markets. Between 2019 and 2023, sales in China compounded at a 20–25% annual growth rate. The region became a critical growth driver, especially for the company’s IP portfolio.

But now, that dynamic has reversed.

Chinese semiconductor and system companies are reluctant to initiate chip design projects that may be interrupted midstream by regulatory changes. Even if U.S. authorities temporarily allow sales, buyers hesitate to commit because another restriction could appear at any moment.

As a result:

• IP-related sales in China have slowed sharply.

• Management expects muted growth in fiscal 2026 for this segment.

• Foundry customers are assumed to provide no new IP orders in 2026.

This represents a sharp reversal from just a year ago, when China was considered one of the company’s most promising markets.

The Bigger Picture: Not Just Synopsys

Synopsys is not alone in facing these headwinds. Major semiconductor firms including Nvidia (NVDA) and AMD (AMD) have also struggled to maintain sales momentum in China amid shifting U.S. restrictions.

Even after receiving government approval to resume sales of certain products, both companies reported that Chinese customers were hesitant to restart purchases. The logic is simple: if you can’t rely on stable supply from U.S. partners, you look elsewhere.

That’s the broader theme at play here—geopolitical uncertainty is forcing China to reduce dependency on U.S. technology.

Core Business Still Strong

While the China headwinds are significant, it’s important not to lose sight of the bigger picture. Outside of China, Synopsys continues to perform strongly.

• The EDA software segment is growing at a healthy pace, supported by rising demand for AI, 5G, and advanced node designs.

• Verification and design automation tools remain sticky, with high switching costs keeping customers locked in.

• The company’s acquisition strategy is helping expand its capabilities, despite short-term disruptions during integration.

Management emphasized that the rest of the business remains on track and in line with expectations. The key issue is not broad weakness, but rather the drag from China.

Financial Highlights and Valuation

Synopsys remains a financial powerhouse:

• Revenue: Double-digit growth, excluding China headwinds.

• Margins: Operating margins remain robust, reflecting strong pricing power.

• Free Cash Flow (FCF): Continues to scale, supporting acquisitions and buybacks.

• Balance Sheet: Healthy, with manageable debt levels and strong liquidity.

However, the stock’s valuation tells a different story.

Using my discounted cash flow model, I estimate Synopsys’ fair value at $380 per share. At the current market price of around $420, the stock remains overvalued, even after its post-earnings decline.

This suggests that investors are still pricing in a smoother growth trajectory than what management itself is guiding for, particularly regarding the IP segment.

What’s Behind the Sell-Off?

The sell-off following earnings was driven by:

1. Muted guidance for fiscal 2026, particularly in the IP segment.

2. China’s slowdown, which removes a previously high-growth market.

3. Investor concern that these headwinds may persist for years, not just quarters.

Wall Street tends to punish growth stocks when expectations are reset. That’s exactly what we’re seeing with Synopsys.

Risk Factors to Watch

Investors should keep a close eye on several key risks:

• Geopolitical risk: U.S.–China relations remain highly volatile.

• Customer concentration risk: China represented a significant growth engine—its loss leaves a gap.

• Integration risk: Ongoing acquisitions need smooth execution.

• Valuation risk: At over $400 per share, the margin of safety is thin.

Investment Verdict: Hold, Not a Buy

Based on current fundamentals, management guidance, and my valuation work, I rate Synopsys as a hold at today’s levels.

• Fair Value: ~$380 per share.

• Current Price: ~$420 per share.

• Margin of Safety: Absent at today’s valuation.

While the long-term business remains strong outside of China, the geopolitical drag is significant, and it will take time for Synopsys to fully adjust.

Conclusion: Key Takeaways for Investors

Synopsys remains one of the most important companies in the global semiconductor ecosystem. Its software and IP tools are mission-critical for advanced chip design, and its core business outside of China remains robust.

However, the China growth engine has stalled, introducing a new layer of risk and uncertainty. Investors who buy at current prices are paying a premium for a company facing a multi-year headwind in one of its most important markets.

At ~$420 per share, Synopsys looks overvalued relative to my fair value estimate of $380. For now, the prudent stance is to hold, not buy.

🔑 Key Investor Takeaways:

1. Synopsys delivered strong results outside of China but faces a major setback in its IP business tied to the Chinese market.

2. U.S.–China trade restrictions create structural risks that are not quickly reversible.

3. My DCF valuation suggests fair value at ~$380, below the current ~$420 trading price.

4. Synopsys remains a high-quality company, but investors should wait for a better entry point with a proper margin of safety.

5. For now, the stock is best viewed as a hold.