Why Synopsys Stock Popped, Then Dropped

Synopsys (NASDAQ: SNPS) stock, which makes design and simulation software for pre-production work on semiconductors, jumped nearly 5% in early trading Thursday before reversing and giving back most of its gains. As of 11:15 a.m. ET, Synopsys is up only 1%.

But why did it pop in the first place at all?

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A brief description of why Wall Street loves Synopsys

Synopsys reported powerful Q3 profits last month, with 42.5% sales growth driving GAAP earnings up 89%. CEO Sassine Ghazi said "unprecedented complexity" in AI chips is increasing the need for Synopsys's software.

Responding to the good news, two separate analysts upgraded the stock this week. BNP Paribas removed its underperform rating yesterday. Today, HSBC analyst Stephen Bersey went a step further, upgrading Synopsys to "buy" with a $700 price target.

Referring back to the CEO's comments, Bersey declared that Synopsys is "transforming into an AI beneficiary" as more complicated chips are designed to specialize in agentic AI. The analyst forecasts that Synopsys could earn $20.01 per share next fiscal year, and values those profits at 35x forward earnings, resulting in the $700 target price.

What's next for Synopsys stock?

Here's what you need to keep in mind when considering this forecast, though: It almost certainly refers to non-GAAP earnings. This year, most analysts have Synopsys pegged for only $4.08 per share in GAAP profit, but $15 per share in non-GAAP profit. Growth to $20.01 would therefore be about 33% annual growth on the non-GAAP side -- not an unreasonable target.

But GAAP profits will almost certainly be a lot lower than that. Applying a 33% growth rate to this year's forecast of $4.08, for example, would imply 2027 earnings of only $5.44 per share -- and an expensive 79x P/E ratio.

Caveat investor.

Rich Smith 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.