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

Key Takeaways

• 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

Provides electronic design automation software products used to design and test integrated circuits.

• 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

• 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

• 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

• 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.