The stock market has experienced significant fluctuations lately due to tight jobs data amid stubborn inflation and recent bank failures. However, software company Synopsys, Inc. (SNPS) has performed well, primarily due to its robust fundamental positioning. I believe buying more of SNPS' shares this month would be wise for reasons discussed throughout this article.
SNPS has gained 25.8% over the past nine months and 5.1% over the past month to close its last trading session at $372.53. Also, Wall Street analysts see an upside potential of 15.8% in the stock.
SNPS delivered strong first-quarter results, beating analysts’ revenue and EPS estimates. The company projected a revenue range of $1.36-$1.39 billion for the second quarter and $5.78-$5.83 billion for the full fiscal year. The non-GAAP EPS is expected to be $2.45-$2.50 for the second quarter and $10.53-$10.60 for the full fiscal year.
Its net income has grown at CAGRs of 25% over the past three years and 82.7% over the past five years. Also, its EPS has grown at CAGRs of 24.8% and 81.8% over the past three and five years, respectively.
In February, SNPS announced entering into an accelerated share repurchase agreement (ASR) with Bank of America N.A. to repurchase an aggregate of $300 million of its stock. The share repurchase program helps increase the existing shares' value and indicates the company’s confidence in its prospects.
Here is what could shape SNPS’ performance in the near term:
Robust Financials
SNPS’ total revenue increased 7.2% year-over-year to $1.36 billion for the fiscal first quarter that ended January 31, 2023. Its time-based products revenue and total products revenue rose 10.6% and 4% year-over-year to $782.31 million and $1.12 billion, respectively.
The company’s non-GAAP net income increased 7.9% year-over-year to $406.67 million. Its non-GAAP EPS increased 9.2% year-over-year to $2.62.
Strong Profitability
SNPS’ trailing-12-month net income margin of 18.22% is 530.9% higher than the industry average of 2.89%. Its trailing-12-month levered FCF margin of 30.25% is 357.8% higher than the industry average of 6.61%.
The stock’s 21.50% trailing-12-month EBIT is 265.6% higher than the 5.88% industry average. Its 24.43% trailing-12-month EBITDA margin is 117.8% higher than the industry average of 11.22%.
Furthermore, SNPS’ trailing-12-month ROCE, ROTC, and ROTA of 17.10%. 11.27% and 9.85% are higher than their respective industry averages of 4.85%, 3.19%, and 1.55%.
Favorable Analyst Estimates
Analysts expect SNPS’ revenue for the fiscal year 2023, ending October 2023, to rise 14.1% year-over-year to $5.80 billion. Its EPS is expected to grow 18.9% year-over-year to $10.58 for the same period.
SNPS’ revenue and EPS for the fiscal third quarter ending July 2023 are expected to increase 19.2% and 28.1% year-over-year to $1.49 billion and $2.69, respectively. The company has an impressive earnings surprise history as it topped the consensus EPS and revenue estimates in each of the trailing four quarters.
POWR Ratings Reflect Solid Prospects
SNPS has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SNPS has an A grade for Quality, consistent with its impressive profit margins.
It also has a B grade for Sentiment, in sync with optimistic analyst estimates.
Within the 133-stock in the Software – Application industry, SNPS is ranked #20.
Beyond what I stated above, we have graded SNPS for Growth, Value, Stability, and Momentum. Get all SNPS ratings here.
Bottom Line
SNPS is currently trading above its 50-day and 200-day moving averages of $355.04 and $331.45, respectively, indicating an uptrend.
Moreover, for the fiscal year 2023, SNPS reaffirmed its objectives of 14-15% revenue growth and continuous non-GAAP operating margin expansion. The company projects its non-GAAP EPS to grow at a rate of 18-19% in the current year.
Given SNPS’ robust financials, high profitability, and solid growth prospects, the stock could be an ideal buy this month.
How Does Synopsys Inc. (SNPS) Stack up Against Its Peers?
SNPS has an overall POWR B Rating, which equates to a Buy rating. Check out these other stocks within the same industry with A (Strong Buy) ratings: eGain Corporation (EGAN), Commvault Systems, Inc. (CVLT), and Progress Software Corporation (PRGS).
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SNPS shares were trading at $372.93 per share on Monday morning, up $0.40 (+0.11%). Year-to-date, SNPS has gained 16.80%, versus a 2.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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