Why Synopsys Stock Just Popped
Key Points
Nvidia has just invested $2 billion in Synopsys stock.
The two tech companies will partner to improve AI and the Omniverse.
Synopsys stock looks very expensive on both P/E and P/FCF valuations.
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Synopsys (NASDAQ: SNPS) stock jumped 3.7% through 11:45 a.m. ET Monday after announcing a "strategic partnership" with AI semiconductor giant Nvidia (NASDAQ: NVDA).
Oh, and Synopsys also announced that Nvidia is giving it $2 billion.
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Synopsys + Nvidia = Better Together?
In fact, Synopsys says Nvidia has already spent $2 billion buying Synopsys stock, as a first step to cementing a "multi-year collaboration." Synopsys says the companies can "achieve simulation speed and scale previously unattainable through traditional CPU computing," accelerate computing, improve "agentic and physical AI," and make better "Omniverse digital twins."
Going forward, the companies will collaborate on product development and marketing, build "cloud-ready solutions," work to improve agentic AI, and double down on making the Omniverse (what other companies call the "metaverse") a reality.
Is Synopsys stock a buy?
Synopsys noted that it sold Nvidia the shares at a slight discount, $414.79 per share, a bit less than what the shares cost at close of trading last week, but significantly higher than where Synopsys traded for most of November. And thanks to Synopsys's rise today, Nvidia has already made a small profit on the transaction.
But are more gains in store? Should you now do what Nvidia is doing, and buy Synopsys stock?
I'm not so sure. Priced north of $80 billion and carrying about $12.5 billion in net debt, Synopsys stock costs more than 41 times trailing earnings -- but is expected to grow those earnings at less than 10% annually over the next five years, according to data from S&P Global Market Intelligence. Free cash flow at the software maker also looks disturbingly weak, and Synopsys's price-to-free cash flow ratio is an even pricier 61.5.
Nvidia or no Nvidia, at this price, Synopsys stock looks like a sell to me.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Synopsys. The Motley Fool has a disclosure policy.
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