Synopsys SNPS shares plunged 20.1 over the past six months. This stark decline stands in contrast to the Zacks Computer and Technology sector and the S&P 500 index’s growth of 1.1% and 3.8%, respectively. SNPS stock has also underperformed the Zacks Computer - Software industry’s decline of 3.3%.

As Synopsys is trading near its 52-week low of $492.54, investors are left wondering: Is it time to buy the dip or wait for further clarity.

Key Challenges Impacting Synopsys' Performance

Synopsys’ underperformance can be attributed to several factors. Synopsys’ IP and hardware revenues tend to be uneven, as revenue recognition is dependent on the customer’s product adoption schedule. SNPS’ revenue recognition is also challenged by capacity constraints for deploying hardware in data centers, causing uneven financial performance.

Six Month Price Performance Chart

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Synopsys’ other concern has been the sluggish recovery in markets like mobile, PC and automotive, which are vital for Synopsys’ customer base. These segments are experiencing slower-than-expected growth as consumer demand remains muted amid economic uncertainties. Specifically, the mobile and PC markets are recovering at a slower pace due to global supply chain disruptions and inflationary pressures affecting consumer spending power.

In fiscal 2024, Synopsys noted that its Design Automation segment saw a 12% year-over-year increase in revenues, driven by robust demand for EDA software and hardware. However, this growth was partially offset by weaker demand in the consumer electronics space, underscoring the challenges in these sectors. The automotive market, while contributing positively with a 24% revenue growth in the Design IP segment, is also vulnerable to macroeconomic slowdowns and regulatory changes affecting vehicle production and sales.

US-China Tension Hinders SNPS’ Growth

For Synopsys, revenues from its business in China have accounted for more than 15% of its total revenues in 2022 and 2023. Its significant exposure to China presents both opportunities and risks. While China remains a critical market for semiconductor companies, regulatory challenges and trade tensions between the United States and China continue to weigh on investor sentiment.

The recent escalation in these tensions, particularly the ever-increasing export controls and entity list restrictions toward China by the U.S. Department of Commerce adds a layer of uncertainty for Synopsys.

Synopsys’ Premium Valuation: A Concern for Investors

Synopsys currently trades at a forward 12-month price-to-sales (P/S) multiple of 10.97x, significantly above the industry average of 8.50x. While this premium highlights the company’s leadership and growth prospects, it also raises concerns about limited near-term upside, especially in a volatile market environment.

However, despite these challenges, not everything is gloom and doom for the company.

Forward 12-Month P/S Multiple

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Synopsys’ Strategic Partnerships Provide Stability

Despite the challenges, SNPS continues to gain from its strong strategic partnerships and technological leadership. Its partnership with industry giants like Taiwan Semiconductor Manufacturing TSM, NVIDIA NVDA, Intel and Arm Holdings ARM has enabled Synopsys to maintain its position at the forefront of chip design innovation.

Partnerships with these industry leaders are not just about technology sharing, they allow Synopsys to co-develop solutions that are critical in advancing AI, high-performance computing (HPC) and next-generation semiconductor designs.

For instance, Synopsys and Taiwan Semiconductor Manufacturing’s joint efforts on Multi-Die test chip tape-outs are instrumental in driving efficiencies and reducing time-to-market for complex semiconductor designs. NVIDIA has been using Synopsys software for GPU design. Synopsys and Arm collaborated to roll out integrated solutions for next-generation chiplets, SoCs and systems in AI, HPC, automotive, mobile and IoT sectors.

Synopsys Expands Its AI Capabilities

Synopsys continues to expand its technological leadership through strategic initiatives. The company's investment in AI-powered design automation tools has strengthened its portfolio, catering to industries undergoing rapid transformation.

The company has achieved numerous milestones in artificial intelligence throughout 2024. To expand its footprint in the automotive space, SNPS partnered with SiMa.ai to develop solutions that help automotive companies quickly develop silicon and software for AI-powered features in next-generation vehicles.

In 2024, Synopsys’ AI-driven digital design and analog design flows achieved certification on Samsung Foundry's SF2 process. SNPS partnered with TSM to develop cutting-edge EDA and IP solutions for TSMC's advanced process and 3DFabric technologies. Additionally, Synopsys released AI products, including its first complete PCIe 7.0 IP solution, Polaris Software Integrity Platform, Synopsys ZeBu EP2 and HAPS-100 12.

Its expansion in the AI space gives Synopsys fresh opportunities to drive top-line expansion. The Zacks Consensus Estimate for fiscal 2025 and 2026 depicts continued growth in revenues and earnings.

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Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Conclusion: Hold Synopsys Stock for Now

Synopsys’ 20% decline over the past six months highlights the stock’s near-term challenges, including valuation pressures and macroeconomic uncertainties. However, its strong fundamentals, robust financial performance and leadership in driving technological innovation underscore its potential for long-term success.

For existing investors, maintaining a hold position allows participation in Synopsys’ growth story while navigating short-term volatility. For new investors, waiting for a better entry point during a market pullback could offer a more attractive opportunity to invest in this industry leader.

Currently, Synopsys carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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