Synopsys: Long-Term Opportunity Outweighs Near-Term Headwinds

Key Points

• NVIDIA-backed Synopsys has struggled as of late, but still maintains a dominant position in a key part of the semiconductor industry.
• The firm's Ansys acquisition is progressing, with new product monetization set for 2027.
• Synopsys' long-term outlook remains positive, with the stock trading at depressed valuation multiples compared to its history.

Electronic automation design (EDA) stock Synopsys NASDAQ: SNPS has been in a rut over the last several months. While EDA revenue growth remains strong, the firm’s intellectual property revenue is declining. This is partially due to struggles at one of Synopsys’s top semiconductor foundry customers, Intel NASDAQ: INTC. Furthermore, the company gained approval for its $35 billion acquisition of Ansys, and the deal has been a near-term profitability headwind. 

Still, reasons for optimism are far from bereft. Synopsys is one of the dominant players in EDA, a technology that is crucial for semiconductor design. The Ansys deal expands the company’s total addressable market from simply chips to full-system development. NVIDIA NASDAQ: NVDA also invested $2 billion in the firm, indicating confidence going forward.

Let’s dive into Synopsys’s latest financial results, as well as the Ansys deal, to assess its outlook going forward.

SNPS Posts Beats, But Shares Falter Anyway on Lackluster Guidance Increase

In its fiscal Q1 2026, Synopsys posted revenue of $2.41 billion, slightly beating estimates of $2.39 billion. (Note that the company's fiscal reporting period differs from the calendar year.) Overall, revenue increased by a whopping 66%. However, this was largely due to the company’s Ansys acquisition.

Adjusted earnings per share (EPS) increased by 24% to $3.77, above the company’s guidance. This solidly exceeded expectations of $3.56, which called for approximately 17% growth.

Organically, the firm’s EDA sales increased by 12%, a solid but not overly impressive showing. Meanwhile, Design IP sales fell 6%, consistent with management’s messaging that 2026 is a “transition year” for this part of the business. However, this was Design IP's best showing over the last five quarters. Notably, in three out of the last five quarters, Design IP sales fell by 15% or more.

Despite posting beats, Synopsys shares dropped by approximately 5% after its earnings release. This was due to multiple factors. First off, despite posting an over 20-cent adjusted EPS beat in Q1, the company only raised the midpoint of its full-year EPS guidance by 6 cents. This suggests that the firm does not believe the factors that benefited EPS in Q1 will extend through the rest of the year.

Secondly, NVIDIA reported on the same day as Synopsys and saw its shares sell off as well. Given NVIDIA’s importance within the semiconductor ecosystem, it's reasonable to believe this affected Synopsys.

Ansys: Near-Term Profitability Headwind

The Ansys deal has significantly affected Synopsys’s non-adjusted profitability since closure. In fiscal Q2 2025, Synopsys’s non-adjusted operating margin was 23.5%. By fiscal Q4 2025, the figure had fallen to just 5.4%. This came as the firm had to add Ansys’s costs into its financials, without having enough time yet to develop new products or create cost synergies.

However, in a positive sign, Synopsys’s non-adjusted operating margin moved up by 300 basis points in the latest quarter to 8.4%. This suggests that the firm’s profitability rebound may be in its early stages.

But the real benefits of the Ansys deal should come over the medium to long term. By year three of the merger, Synopsys plans to generate $400 million in cost synergies and to generate $400 million in revenue synergies by year four. To achieve this, the firm will have to streamline operations through lower headcount and develop new combined products. Synopsys plans to launch joint products in 2026 and begin monetizing them in its fiscal 2027.

Ansys: Major Long-Term Addressable Market Tailwind

The combination of these factors; higher revenues and lower costs, would go a long way toward Synopsys’s profitability rebound. Longer term, the Ansys deal is even more compelling.

Synopsys’s EDA tools focus on designing chips, which serve as the “brains” of computing systems. However, companies are increasingly integrating these “brains” into complex machines. Think autonomous vehicles, drones, and robots. These systems face physical constraints, including size, power usage, and the need to dissipate heat. Synopsys argues that it doesn’t make sense to develop the “brain” and “body” of these machines separately.

Using Ansys’s physics simulation software, engineers can understand how physical limitations will affect a machine before building it. This reduces the risk of developing a chip and supporting system separately, only to find that they don’t mesh well in the real world. Fewer mistakes mean fewer costs, a clear incentive for technology developers to adopt Synopsys’s integrated software offerings. As technology gets increasingly more complex, Synopsys can benefit long-term through complete system design, expanding its addressable market.

SNPS: A Long-Term Tech Winner

Though Synopsys has not performed well recently, its long-term outlook remains very promising. Furthermore, the stock now trades at a forward price-to-earnings ratio near 28x, well below its average of 36x over the past three years.

This undervaluation based on historical metrics makes the long-term opportunity in this stock even more appealing.