Synopsys (SNPS) is the backbone of innovation for global electronics and is a safe way to invest in the semiconductor and electronics space while still being able to profit off the impending 5G revolution and the resurgence in hyperscale computing. This company is the market leader in electronic design automation (EDA) tools, which is the foundation of all electronics in the world today. Synopsys has been able to able to consistently beat expectations and progressively risen guidance, driving analysts’ estimates up and SNPS into a Zacks Rank #2 (Buy)
The world of electronics is proliferating with Moore’s Law, which was established 50 years ago by the co-founder of Intel (Gordon Moore), still holding today. The law hypothesizes that every two years the number of transistors on a microchip doubles and the cost halves. Today, integrated circuits or computer chips can hold billions of transistors on a chip the size of your fingernail.
The demand for the newest and fastest technology is always there, and we are on the brink of the next tidal wave of tech. 5G is going to drive the next tech surge as it will exponentially improve the speed and ability to connect. 5G infrastructure is just being put in place, and the world’s largest tech companies are preparing their turnkey solutions for the massive demand this improved infrastructure will spur. Synopsys is at the foundation of new technology and will ride this wave.
Synopsys’s core competency is its EDA tools (making up 60% of revenues) that help design chips as well as the systems that create these chips. Its EDA software serves hardware designers every step of the way from initial design to verification for quick and efficient turn arounds. The EDA market was worth almost $7 billion in 2018 and is expected to grow by nearly 8% annually for the next 5 years, according to IBS data.
Its duopoly with Cadence (CDNS) (controlling 85% of the EDA industry) and high barriers to entry gives the firm, strong pricing power. This high margin business is going to continue to drive robust profitability. Analysts are expecting these margins to expand as the company enjoys economies of scale.
Its IP products provide customers with ready to use chip designs that are proven, saving customers time. It is the 2nd largest global player in this $4.5 billion market, according to IBS’s 2018 data. Synopsys’s massive IP portfolio and over 15 years of investments give them a firm grip on this market.
Synopsys also offers products that improve software developers’ code, ensuring that there are no code defects and verifying that the code is secure. Its software integration revenue only makes up 10% of the topline but is the fastest-growing segment at healthy double-digit growth levels.
Synopsys illustrates growing annual free-cash-flows of roughly $770 million (past 4 quarters), $856 million in cash, and minimal amounts of debt on the balance sheet giving this company a large amount of financial flexibility to continue acquiring in its fragmented markets.
SNPS is trading at a sizable discount to its biggest competitor, Cadence, and in line with its 5-year forward P/E average. These shares have appreciated over 25% so far this year, and I am confident they have more room to run with 11 of 11 analysts calling this a buy right now.
Investors continue to pour money into this innovation machine, despite the pandemic. SNPS is up 30% year-to-date, roughly 70% above its March lows, and sitting at all time highs. Still, these shares still have momentum and are sitting below analysts’ average price target. SNPS may be due for a pullback with the broader markets rally seemingly exhausting. As a long-term investor I see no reason to wait to purchase these shares but be prepared for some short-term volatility.
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Last year, it generated $24 billion in global revenues. By 2020, it’s predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce “the world’s first trillionaires,” but that should still leave plenty of money for regular investors who make the right trades early.
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