SNPS: Profitability Will Accelerate as IP Headwinds Ease Over Time

Analysts have trimmed their price target for Synopsys to approximately $551 from $556, citing persisting headwinds in the company's IP business as well as ongoing uncertainty around China and major foundry customers.

Analyst Commentary

Analyst opinions on Synopsys remain divided following the company's recent quarterly results and guidance, reflecting both optimism and caution regarding its near- and medium-term prospects.

Bullish Takeaways

Bullish analysts continue to see long-term value in Synopsys and maintain positive ratings despite the current turbulence in the IP segment.
While headwinds remain from China and certain foundry customers, these are anticipated to be temporary. There are expectations for gradual normalization over time.
The core business outside of IP is viewed as stable, tracking in line with previous projections. This provides confidence in the company's broader strategy as it enters FY26.
Resource reallocation initiatives and operational adjustments could help accelerate profitability, especially as Synopsys executes cost levers such as targeted workforce reductions over the coming years.

Bearish Takeaways

Bearish analysts cite ongoing weakness in the IP business as a structural concern and caution that muted performance may persist into FY26, given limited visibility and strategic reorganization.
Uncertainty around the impact of China export restrictions and related customer appetite continues to weigh on growth expectations. Some analysts remain skeptical about a quick rebound.
The strategic pivot by a major foundry customer, resulting in obsolete IP blocks, presents an additional drag on revenue and clouds near-term execution visibility.
While management remains constructive, more cautious analysts warn that the multi-quarter nature of the current challenges could keep shares under pressure and impact valuation in the interim.

What's in the News

JuliaHub and Synopsys announced a strategic partnership to integrate JuliaHub's Dyad simulation platform with Ansys TwinAI, enhancing Synopsys's AI-driven digital twin capabilities for advanced system optimization. (Key Developments)
Synopsys unveiled a simulation-driven framework, deployed by Krones, that enables rapid real-time optimization of manufacturing processes by leveraging GPU-accelerated, cloud-native simulation solvers and OpenUSD interoperability. (Key Developments)
A class action lawsuit has been filed against Synopsys and certain executives alleging insufficient disclosure regarding the impact of AI-focused customers on its Design IP business and reporting financial underperformance in the segment. On this news, Synopsys stock dropped nearly 36%. (Key Developments)
Synopsys expanded GenAI capabilities for its semiconductor design suite, introducing new assistive and creative AI features in Synopsys.ai Copilot and broader access for startups and engineers via Synopsys Cloud. (Key Developments)
Synopsys and Tata Technologies have partnered to accelerate software-defined mobility solutions for automotive manufacturers. The collaboration leverages digital twin technologies to address next-generation SDV complexities. (Key Developments)

Valuation Changes

Consensus Analyst Price Target: Lowered modestly from $556.40 to $551.04, reflecting marginally reduced fair value estimates in light of recent headwinds.
Discount Rate: Decreased slightly from 9.01% to 8.97%, which suggests a marginal change in perceived risk and cost of capital.
Revenue Growth: Revised downward fractionally from 21.47% to 21.44%, indicating a near-steady outlook with only a minor adjustment in expected top-line expansion.
Net Profit Margin: Increased marginally from 15.75% to 15.76%, which reflects a slight improvement in profitability expectations.
Future P/E: Declined slightly from 90.04x to 89.08x, indicating minor adjustments in valuation multiples applied to forward earnings.

Expansion into new markets and integration of advanced simulation and EDA tools strengthen Synopsys' leadership and drive growth in sectors demanding complex product development.
Strategic focus on SaaS, cloud, and high-value integrated IP solutions enhances margin improvement, revenue stability, and operational efficiency amid industry transformation.
Geopolitical tensions, customer concentration risk, costly business transitions, financial strain from acquisitions, and operational challenges threaten Synopsys' growth, profitability, and market adaptability.

Catalysts

About Synopsys

Provides electronic design automation software products used to design and test integrated circuits.What are the underlying business or industry changes driving this perspective?

The acquisition and integration of Ansys positions Synopsys as the global leader in engineering solutions from silicon to systems, dramatically expanding its addressable market into sectors like automotive, industrial, and aerospace. This should drive long-term top-line growth as more sophisticated and complex products (especially AI-powered and smart devices) require robust simulation, analysis, and EDA tools.
The accelerating complexity and proliferation of AI, high-performance computing, and multi-die/chiplet-based architectures are increasing customer demand for Synopsys' advanced design, verification, and simulation solutions, solidifying its role as a mission-critical partner in next-generation chip and system development-supporting both revenue growth and opportunities for higher-margin recurring licensing.
Synopsys is executing a strategic shift by pivoting its IP business resources and R&D roadmap towards higher growth, higher value opportunities (such as advanced interface IP, subsystems, and customizable/chiplet solutions). This focus is expected to improve net margins over time as the company capitalizes on industry trends favoring sophisticated and integrated IP offerings rather than commoditized, standalone products.
The ongoing transformation towards SaaS/cloud-based EDA and Ansys product integration is expected to increase customer stickiness and shift more revenues to subscription and service models, improving revenue visibility and earnings consistency-this directly addresses operational headwinds and is likely underappreciated if the stock is undervalued.
The announced 10% reduction in global headcount and ongoing AI-driven productivity initiatives are expected to optimize the cost structure, accelerate operating synergies from the Ansys deal, and help restore operating margins towards the company's target in the mid-40s, positively impacting earnings growth and free cash flow in the medium to long-term.

Synopsys Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Synopsys's revenue will grow by 24.7% annually over the next 3 years.
Analysts assume that profit margins will increase from 21.7% today to 22.3% in 3 years time.
Analysts expect earnings to reach $2.7 billion (and earnings per share of $12.07) by about September 2028, up from $1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.5 billion in earnings, and the most bearish expecting $1.7 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 59.3x on those 2028 earnings, down from 82.8x today. This future PE is greater than the current PE for the US Software industry at 36.2x.
Analysts expect the number of shares outstanding to grow by 1.01% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

Synopsys Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Persistent and potentially long-term export restrictions and geopolitical tensions with China have led to customer uncertainty, contract delays, and a weaker-than-expected performance in the Chinese market, putting sustained pressure on Synopsys' revenue and regional growth outlook.
Large investments in IP for a major foundry customer did not yield the anticipated returns due to market-driven factors beyond Synopsys' control, highlighting ongoing revenue concentration risk and the vulnerability of future earnings to key customer decisions or failures.
The transition of the IP segment from discrete licensing to highly customized subsystems and complex delivery models requires significant resource allocation and may structurally increase development costs; if monetization and business model changes lag this trend, long-term net margins and profitability could erode.
The company's integration of Ansys includes increased debt and delayed divestitures, raising financial complexity and interest expense-at the same time, the need for a 10% global headcount reduction and portfolio realignment could slow organic innovation and pose execution risk, further impacting earnings and cash flows in the near to medium term.
Extended muted growth in the IP business, combined with aggressive guidance resets and the inability to fully capture all market opportunities due to resource limitations, points to operational challenges; failure to rapidly scale or adapt amidst rising customization and a shifting competitive landscape could dampen both revenue growth and long-term shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $652.736 for Synopsys based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $715.0, and the most bearish reporting a price target of just $550.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 59.3x, assuming you use a discount rate of 8.7%.
Given the current share price of $604.37, the analyst price target of $652.74 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

SNPS: Non-IP Segments And China Recovery Will Drive Upside Through FY26