Will earnings boost Synopsys’ share price?

Amid the ongoing disruption to automotive and electronics industries caused by the global semiconductor shortage, chip design software company Synopsys [SNPS] has continued to innovate and grow its revenue.

Despite this, Synopsys’ share price has suffered.

Synopsys’ share price has fallen 9.4% year-to-date, through to 18 May, but is up 93.6% in the last 52 weeks. The stock is also down 21.9% from its all-time high of $300.91, which it reached on 16 February, as a result of the rolling corrections that have hit technology stocks in the last couple of months.

The share price of its nearest competitor, Cadence Design Systems [CDNS] — the companies are two of the biggest players in the electronic design automation tools market — has followed a similar pattern. The stock is down 11.2% year-to-date and down 18.7% from its all-time high of $149.08, at which it also peaked on 16 February this year. That said, it is up 41.7% in the last year (through 18 May).

 

So, how has Synopsys’ share price fared in comparison to the broader technology sector?

The company was one of the top 15 holdings in First Trust Nasdaq Artificial Intelligence and Robotics ETF [ROBT], which is up a marginal 0.7% since the turn of the year (through 18 May). While the fund has gained 52.4% in the past 52 weeks, it has fallen 16.1% from its 16 February all-time high of $59.72.

The Ark Innovation ETF [ARKK], of which Synopsys is a minor holding, returned 77.9% in the last year, as of 18 May, but has dropped 15.8% so far in 2021. The fund is down 34.3% from its 16 February all-time high of $159.70 (as of 18 May’s close).

 

Automotive won’t drive down revenue

With Synopsys delivering its second-quarter 2021 earnings after the bell on 19 May, what can investors expect from the report?

The company had set a revenue forecast for the quarter of $970m to $1bn, which would represent a growth rate of between 12% and 17% on the $861.3m posted in the second quarter of 2020. The consensus estimate between four analysts was $988.47m, according to Zacks Equity Research.

Management is expecting earnings per share to be between $1.50 and $1.55, with the Zacks consensus falling in the middle of the range at $1.52, representing a 24.5% jump on earnings of $1.22 posted in the year-ago quarter.

 

Despite the automotive industry’s slump in output due to the semiconductor shortage and delay in parts being produced and shipped, investors will be keen to see if demand for its products has remained high during the three months to the end of April. Revenue jumped to $970.3m in the first quarter of 2021, up from $834.4m in the year-ago period.

In response to a question from Gary Mobley, an analyst at Wells Fargo Securities, during the first-quarter earnings call as to whether the company had experienced a slowdown, Aart de Geus, CEO of Synopsys, said: “On the contrary. I think the race is on.”

De Geus explained that there are misassumptions about the current pace of design innovation due to the chip crunch’s impact on carmakers. In reality, the automotive industry was never going to redesign its old chips simply because parts will be delayed by a few months, he added.

 

Adding value through acquisitions

Beyond the earnings call, things look positive for Synopsys. A major driver of growth will be the rise in artificial intelligence, 5G and the Internet of Things. Intelligent systems will require more sophisticated technology and advanced chip designs, and this, in turn, could increase demand for the company’s products and services. 

The company could also continue expanding its capabilities with mergers and acquisitions — described on the first-quarter earnings call as “value-enhancing”. For example, in November, it completed the purchase of MoorTec, a provider of in-chip monitoring technology. Sensors monitor voltage and temperature, then feed data on chip performance back, helping users of its Silicon Lifecycle Management software to optimise future designs.

Needham analyst Richard Valera recently reiterated a buy rating for the stock, increasing the price target from $275 to $310, a 24.2% increase on its 18 May closing price of $235.03.

He wrote in a bullish note to clients, seen by TipRanks, that Synopsys’ outlook was “robust”. He cited “ongoing strength in its core business, underpinned by strong design activity.”