Synopsys Inc (SNPS, Financial) recently experienced a daily loss of 4.89%, yet over the past three months, it has gained 5.52%. With an Earnings Per Share (EPS) of 9.08, investors are keen to understand whether Synopsys is modestly overvalued as per its current market valuation. This article delves into the intrinsic valuation of Synopsys, examining its financial strength, profitability, growth, and market position to provide investors with a comprehensive analysis of its fair market value.
Company Introduction
Synopsys Inc (SNPS, Financial) is a pivotal player in the realm of electronic design automation software, intellectual property, and software integrity products. The company's EDA software streamlines the chip design process, improving design precision, productivity, and handling complexity with a full-flow end-to-end solution. Synopsys has also expanded its Software Integrity (SI) business, enabling customers to manage and test their code base for security and quality continually. The convergence of semiconductor companies moving up-stack and systems companies moving down-stack towards in-house chip design has expanded EDA customer bases and benefited vendors like Synopsys. With a current stock price of $565.26 and a market cap of $86.20 billion, we will compare this against the GF Value to gauge whether Synopsys is trading at a fair valuation.
Summarize GF Value
The GF Value is an exclusive metric that calculates the intrinsic value of a stock based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides a visual representation of a stock's fair trading value. If a stock's price significantly exceeds the GF Value Line, it's typically considered overvalued, suggesting a potentially lower future return. Conversely, if the price is well below the GF Value Line, the stock may promise a higher future return.
At its current price of $565.26 per share, Synopsys (SNPS, Financial) appears modestly overvalued when aligned with the GuruFocus Value calculation. The implication is that the long-term return of Synopsys' stock could be less than the company's business growth rate.
Financial Strength
Investing in companies with robust financial strength is crucial to minimize the risk of capital loss. Synopsys' financial strength, with a cash-to-debt ratio of 1.9, may trail behind some of its industry peers, but its overall financial health is strong, as evidenced by a 9 out of 10 ranking by GuruFocus.
Profitability and Growth
Consistent profitability over time indicates a lower risk investment. Synopsys has not only been profitable for the past decade but also boasts an operating margin of 22.99%, ranking higher than 91.65% of its peers in the software industry. This strong profitability is reflected in its 9 out of 10 ranking by GuruFocus.
The growth of a company is a vital indicator of its valuation. Synopsys' 3-year average annual revenue growth rate of 16.7% and EBITDA growth rate of 22.2% position it favorably within the software industry.
ROIC vs WACC
Evaluating a company's Return on Invested Capital (ROIC) against its Weighted Average Cost of Capital (WACC) provides insights into its profitability relative to the capital invested. Synopsys' ROIC of 15.16 versus its WACC of 11.03 suggests that the company is generating value for its shareholders.
Conclusion
In summary, Synopsys (SNPS, Financial) stock seems to be modestly overvalued. The company's financial strength is robust, and its profitability and growth metrics are impressive compared to other companies in the software industry. For those interested in a deeper dive into Synopsys' financials, you can view its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
