Why Synopsys Stock Soared on Thursday
Key Points
Synopsys gave revenue guidance as high as $11.2 billion in its just-concluded Investor Day.
Analysts expect the company to produce only $9.7 billion in 2026 revenue.
Free cash flow next year should be about $3.1 billion.
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Synopsys (NASDAQ:SNPS) stock, which makes design and simulation software for pre-production work on semiconductors, jumped 12.5% through 10:20 a.m. Thursday, after telling investors at its Investor Day that it expects to grow revenue as much as 15%, to $11.2 billion, in 2027.
Analysts polled by S&P Global Market Intelligence forecast only $9.7 billion in 2026 revenue and $11 billion in 2027.
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What else Synopsys said about 2027
Synopsys targets a 20.7% operating profit margin in 2027. Non-GAAP margins, which have been much stronger for the company lately, will remain so; management claims its non-GAAP margin will average 44% next year.
These widely diverging accounting treatments will continue to produce widely diverging totals for Synopsys's profits. Under GAAP, the company expects to earn only $8.16 to $8.61 per share next year, but under non-GAAP, it says profits will range from $19.04 to $19.12 per share.
Which number should investors focus on?
That above is the $64,000 question. Do you value Synopsys based on its all-too-fudgeable non-GAAP earnings, or stick with tried and true generally accepted accounting principles (GAAP)? Pick the former, and Synopsys stock will look reasonably priced at a price-to-earnings ratio of about 25.4. Give Synopsys credit only for its GAAP earnings, however, and Synopsys stock is going to look awfully expensive at nearly 58 times forward earnings!
This would be a difficult decision except for one thing: A third valuation metric, price-to-free cash flow, happens to align almost exactly with P/E using non-GAAP earnings.
Valued on its free cash flow, which management estimates will be $3.1 billion in 2027, Synopsys costs just a little over 25 times FCF. With analysts forecasting that Synopsys will average 22% earnings growth over the next five years, that seems like a fair price to me.
Should you buy stock in Synopsys right now?
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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.
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