This Technology Stock Just Crashed 35% in 1 Day. Time to Buy?

Key Points

• Synopsys' design IP business faces significant near-term headwinds.

• But its acquisition of Ansys has the potential to revolutionize its earnings potential.

• It will take time to work through headwinds, but the long-term case for Synopsys is powerful.

• 10 stocks we like better than Synopsys ›

Investors in electronic design automation and engineering simulation software company Synopsys (NASDAQ: SNPS) recently saw their stock crash more than 35% on the day of its third-quarter earnings release. The decline prompted Cathie Wood's Ark Invest to double down on the stock by purchasing almost 16,000 shares for its exchange-traded funds (ETFs).

Should investors follow Ark into buying Synopsys on a dip, or is this the start of a deeper move downward?

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How Synopsys is poised for growth

Before delving into the details of the third-quarter update, it's worth examining the long-term investment case and why Ark is enthusiastic about the company. The case for Synopsys rests on the surge of interest in artificial intelligence (AI)-powered products and the growth of the market for companies developing custom-made chips to integrate into their products.

As products become increasingly smart, and the value quotient of a product stemming from its software/intelligence continues to rise, there will be significant opportunities for Synopsys to expand beyond its core customer base. Synopsys is a leader in the electronic design automation (EDA) that semiconductor and electronics companies use to design chips, including AI chip design.

While semiconductors are its core customer base, a growing number of electronics, technology, automotive, medical, industrial, aerospace, and defense companies are designing chips in-house. As such, Synopsys has an organic growth opportunity -- and that has been enhanced by a high-profile acquisition.

Why the Ansys deal is a game changer

The recent acquisition of engineering simulation and analysis software company Ansys will help accelerate that growth, not least because Ansys' existing customer base (companies that want to simulate and model) is a lot broader than Synopsys' base. In a nutshell, the acquisition of Ansys will allow Synopsys to amplify its sales footprint to a customer base it's already expanding in.

It will also create a so-called "silicon-to-systems" solution provider, whereby it sells EDA (legacy Synopsys) to help customers design chips, and simulation software (new Synopsys/Ansys) so they can model how the chips and products infused with AI will perform.

What happened in the third quarter

While the long-term outlook for its EDA, simulation, and analysis solutions (Ansys) remains excellent, the company's second business segment -- design intellectual property (IP) -- faces significant near-term challenges, and it showed in the near 8% decline in sales in the third quarter.

Data source: Synopsys.

While EDA provides the tools to design and develop chips, design IP offers third-party IP blocks (licensed for use) that customers can incorporate into their design. Intel is a longtime customer and collaborator. Discussing the disappointing performance in the third quarter, CEO Sassine Ghazi narrowed it down to three reasons:

• Export restrictions curtailed investment decisions for customers investing in China.
• "Challenges at a major foundry customer are also having a sizable impact on the year," according to Ghazi on the earnings call.
• Partly in connection with the issues at the foundry customer (possibly Intel) Ghazi noted, "We made certain road map and resource decisions that did not yield their intended results."

Consequently, Ghazi said he was taking a more cautious view of the fourth quarter and refocusing resources on higher-growth areas in design IP, while conducting a strategic review of his portfolio.

Image source: Getty Images.

What it means for investors

On one hand, the share price crash presents an interesting opportunity to buy into an exciting long-term growth story.

On the other hand, investors should be aware that the issues identified in the design IP segment may take time to resolve. Even though the restrictions on Synopsys sales to China have been lifted, the impact persists, with Ghazi noting that customers are "questioning whether or not they will invest in a multiyear commitment with Synopsys, how broad will they make that investment?"

The issue with the foundry customer is something Synopsys has control over, and the adjustments to its design IP business toward higher-growth opportunities will take time to come to fruition. Meanwhile, management is busy integrating the Ansys acquisition.

While the sell-off appears overdone, it will take time for Synopsys to work through these issues, and cautious investors will want to see some hard evidence of improvement before buying in.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel and Synopsys. The Motley Fool recommends the following options: short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.