SNPS 估值便宜，适合长期持有；能否恢复每股盈利增长是主要不确定性。

Two companies that we started talking about at the very beginning of Chip Stock Investor were Synopsys and Cadence Design Systems.

We're gonna be focusing on Synopsys today. I was setting this up as a Cadence versus Synopsys. We're gonna focus a little bit more on Synopsys today, because both of these companies have actually underperformed.

Here's a stock price chart for both Cadence and Synopsys.

Cadence is in orange, Synopsys is, of course, in purple. And if you compare both of these companies to the SOXX ETF, they have hugely underperformed.

For the first couple of years that we have this charted out from June 2022, Cadence and Synopsys kind of moved in step with one another, but then there's this divergence over the last couple of years where Cadence has definitely performed better.

Yeah, you'd have been much better off just owning one of the semiconductor ETFs. But yeah, what the heck is up with Synopsys?

It's really bad. It's been pretty egregious. It's what I would call a bummer.

It's been one year since the merger of Synopsys with Ansys, and that's been one of the issues that's been dragging Synopsys down. There's been a number of drags on Synopsys, not only because of this merger, but some other items as well.

They have finally launched a new product that teams both Synopsys and Ansys together in this Multiphysics Fusion Solutions.

Synopsys plus Ansys, this multi-physics fusion system helps teams get all of that done. And this is exactly the vision that Synopsys had when they decided to merge with Ansys.

Using these tools, leveraging AI, this multiphysics fusion to help with designing chips and systems for the AI era. Synopsys plans to get back to that mid-teens percent revenue growth by leveraging this merger.

Yeah, and they have some new tools, AI agents that help engineering teams with verification and validation of what they're working on, the multi-physics fusion software that they just launched, and there will be additional products that will continue to roll out through 2027.

They think that will start to have a positive impact on revenue starting next year. As we've talked about many times in the past with Synopsys and Cadence Design, the duopoly in EDA platforms, semiconductor and electronics R&D spending tends to grow at a high single digit to low teens percentage rate every year, almost regardless of the economic condition.

And so these companies tend to be able to generate around 10% organic revenue growth year in and year out, and then they supplement that with the occasional acquisition or the even less occasional mega merger with Ansys.

And so the revenue growth is very positive. That part of the story is very good, and that remains very much intact for Synopsys. So what went wrong? Synopsys has been aware that they need to tighten up on their IP portfolio.

But that's kind of curious because here in June of this year, they decided to sell off some of their IP, their processor IP solutions business to GlobalFoundries.

So if they're trying to make sure that their IP business is up to snuff, why sell off part of it? Well, it's been a segment of their portfolio that caught them off guard last year.

That was part of the revenue and especially the profit miss after the Ansys merger was completed.

And so they decided that they can actually focus more on IP that helps their customers do higher end customization work. Why would they want to spend $450 million of their hard-earned cash if Synopsys can't do anything with it?

And GlobalFoundries bought that IP, and then they're pairing it with the Synopsys Arc processor IP.

Synopsys decided to cash out. So let's take a look at the financials for Synopsys. You can see that the revenue for Synopsys has grown steadily over the last few years.

They've had a little bit of a drop-off there in last quarter, but back to growth in the most recent quarter which was June 2026. The issue has been in profitability and margin expansion.

And related to that has been the IP portfolio optimization that Synopsys needs to do. This includes their design automation as well as IP. In orange, 2 billion of that total is design automation revenue, and then in blue is 470-plus million in for the IP portfolio.

Close to 20% of their revenue comes from that IP portfolio. So as good and steady as the revenue has been for Synopsys, there have been these effects.

First, the big jump in revenue related to Ansys, and now optimization of the IP portion of the business that's creating some disconnect between what the actual organic revenue growth rate has been.

And on a more organic basis, the core EDA platform business, it's been about 8 to 9%. It was at 8.5% last quarter. So therein is another problem. The core business, when you strip away acquisitions and divestitures, has been a bit more sluggish, and you could blame some of the more traditional non-AI design work from Synopsys customers lagging behind the high growth part of the market, all the AI stuff, AI accelerators, and everything related to it.

This is why they've been working on optimizing things so that they can get better in line with what the market is truly reflecting for the semiconductor industry overall. Continuing on our financial analysis, one of the other issues is the balance sheet.

So here in blue, we have the total long-term debt for Synopsys.

Currently Synopsys has over $6 billion in net debt, including that short-term debt that they're gonna have to take care of here sometime soon.

So there's been an overhang from the Ansys acquisition. Should be no surprise there. At the time that the acquisition was announced, we said that that was likely going to be one thing the market would be hyper concerned with in the first year or two.

We're now in year two of Synopsys plus Ansys. The market is indeed wondering how soon this debt will get back under control and net interest expense will get reduced back to a much more reasonable level.

But recall, it's not just cash that Synopsys had to raise to finish the Ansys acquisition. They also paid out some new stock to Ansys shareholders so that the newly combined business would let the Ansys shareholders in on the game.

Because you see the problem here, and especially the last two years, the share count has increased. That big jump last year is Synopsys doling out that extra stock to complete the Ansys merger.

And because there hasn't been a larger share repurchase program in place since then, they've been using excess cash to pay down that extra debt. The total share count has continued to creep up because of higher R&D expense to do things like AI agents, get AI agent products up and running.

They've also had some elevated expenses with restructuring. You see that reflected in the GAAP earnings per share tanking, two, three quarters ago. And so that's been the other problem here.

The capital structure of the business has been kind of thrown off kilter. And on a free cash flow per share basis, things have been pretty flat.

Coming out of the bear market in 2022, we'd see this metric climb, but there's been elevated expenses, and so Synopsys has had to pay more for all of those expenses, which has drawn down the free cash flow per share.

Kasey, walk us through why Synopsys underperformed not just the market overall, but its smaller peer, Cadence Design Systems.

The first one we've talked about in depth, effects from the Ansys mega merger, including that increased debt, deleverage, and higher share count. Intel was Synopsys' largest customer.

In fact, it was low teens percent of revenue in fiscal 2023 and 2024. But then by 2025, the revenue percentage came in at under 10%.

Yeah. Intel's pain was not Synopsys' gain. It was also its pain too.

It didn't mean total loss for Synopsys, but Cadence was able to wiggle its way in there a little bit more. And number four, higher R&D investment to keep up with the new AI capabilities and the non-AI demand now stabilizing.

Number five, misses in the IP licensing business, portfolio shuffling and refocusing. That's now complete, we think, so they should be making some progress in that area.

And then number six, simple valuation, multiple compression. Historically, Synopsys has traded at a high 30X forward price to free cash flow, and the market has discounted that quite a bit.

On a forward-looking basis, it's now under 30X, mid to high 20X price to free cash flow on a one-year forward basis. Nothing wrong with that. It's healthy.

But after the initial run in 2022, '23, and first half or so of 2024, before the announced intention to acquire Ansys, Synopsys and Cadence's valuation got quite high.

And since then, the market has been slowly bringing that back down to a more reasonable level. So, what was a pretty great little duo in the portfolio, the last two years, not so much, and especially not Synopsys.

Current price around $415. And the reason for that is GAAP earnings per share still has a lot of effects because of the merger with ANSYS. There's higher amortization expense, there's the restructuring charges, so we wanted to use just free cash flow on a per share basis to kind of strip away the effects on a GAAP per share basis.

We used a discount rate of 10% and a terminal growth rate of 5%, but what that bakes in is 9% growth rate over the next 10 years. Now, as we said earlier, the goal for Synopsys is mid-teens percent revenue growth.

Can that translate into 9% profitability growth? That is the big question at this point.

It never really was about the revenue growth. It was about managing the cash conversion cycle. And that is still the outstanding question right now. It's been a rough couple of years, but it would appear management has some things in place to be able to return to per share profit growth, especially on a free cash flow basis.

They have new products that are the result of Synopsys' traditional EDA software paired with Ansys' physics simulation software, Physics Fusion software, pretty cool stuff.

AI agents are now able to run around and get work done autonomously for engineering teams. The IP portfolio has been reworked. Now we're in prove it mode. Let's see what they're able to do.

It would appear, based on historical results, Synopsys is indeed cheap if you're looking at a software component to your portfolio for the next five to 10 years. But it's always about whether the management team is able to execute.