1 Reason Wall Street Is Obsessed With Synopsys Stock

Key Points

• The problems in its business primarily relate to the smaller of its business segments.

• Investors remain relatively bullish over its long-term growth prospects, which include the recent Ansys acquisition.

• 10 stocks we like better than Synopsys ›

Electronic design automation (EDA) and engineering simulation software company Synopsys (NASDAQ: SNPS) recently released a disappointing set of third-quarter earnings, resulting in a collapse in its share price. As ever, Wall Street analysts immediately rushed to lower price targets.

But here's the thing. Generally, the adjusted price targets remain significantly above the current price. Of the 22 analysts covering the stock, 18 have "buy" or "outperform" ratings, while one has an "underperform" rating.

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Wall Street still loves Synopsys

The price targets on the post-earnings analyst updates range from Piper Sandler's $630 to Berenberg's $500. This compares to the current price of almost $500 and a post-earnings price of below $390.

One possible reason why Wall Street remains obsessed (in a good way) with the stock is that the problems revealed in the update relate to its smaller Design Intellectual Property (IP) segment. In contrast, its core EDA segment (sales up 23.5% year over year) is performing well, and the exciting recent addition of engineering simulation software company Ansys adds a new growth dimension.

The idea is that Ansys' broader range of end-market customers will naturally align with Synopsys' core EDA business as more industries and customers begin to incorporate semiconductors and AI-driven applications into their products. As such, the opportunity to offer what Synopsys management calls "silicon to systems" solutions to customers has a natural appeal. Customers can both design chips with Synopsys' EDA and test the interactions between these chips and their embedded products.

Image source: Getty Images.

Where next for Synopsys?

It will take time for management to turn things around in the Design IP segment, but a few quarters of ongoing growth in EDA, combined with the successful integration of Ansys, will help strengthen the long-term case for the company. Wall Street believes that the potential of the latter outweighs the downside risk associated with the former.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Synopsys. The Motley Fool has a disclosure policy.