Synopsys Inc. SNPS shares have plunged 22.4% in the past year, underperforming the Zacks Computer and Technology sector and the S&P 500 index’s return of 7.8% and 9.5%, respectively. The stock has also underperformed Zacks Computer – Software industry’s decline of 4.6% in the same time frame.
This underperformance raises questions — whether investors should buy, sell or hold SNPS stock?
Synopsys One-Year Price Return Performance
Zacks Investment Research
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Key Challenges Impacting Synopsys' Performance
Sluggish recovery in markets like mobile, PC and automotive, which are vital for Synopsys’ customer base, has undermined the confidence of investors. 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, inflationary pressures and still-high interest rates, affecting consumer spending power.
Rising fears of a U.S. economic slowdown and muted growth within the company's key design automation segment have undermined investors' confidence. Protectionist policies implemented by the U.S. government can potentially raise the cost of raw materials, disrupt the supply chain and cause retaliatory measures from other nations.
US-China Tension Thwarts SNPS’ Growth
For Synopsys, revenues from its business in China have accounted for more than 15% of its total revenues in 2024, 2023 and 2022. 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.
Slowdown in Design Automation: A Key Concern for Synopsys
Synopsys’ Design Automation segment, the backbone of its business, is showing signs of slowing growth. In the first quarter of fiscal 2025, revenues from this segment grew 0.8% year over year, reaching $978.7 million. The design automation segment, which previously achieved double-digit growth in past years, is now expanding at a much slower pace, with growth limited to the low single digits.
The slowdown in this critical segment raises concerns because Synopsys' Electronic Design Automation tools are fundamental to the semiconductor design process. Any deceleration in this area could signal challenges in maintaining the company's competitive edge. The decline can be attributed, in part, to economic uncertainties, as semiconductor companies cut on research and development spending due to fears of a potential slowdown.
Synopsys’ Valuation Still Looks Lofty
Despite the recent drop in Synopsys' stock price, the company still trades at a high forward 12-month price-to-earnings (P/E) ratio compared to the sector. The lofty P/E multiple reflects the high expectations for the company’s future growth. However, the deceleration in the Design Automation segment revenue growth raises concern that the stock's current valuation is too high to be justified.
Synopsys Forward 12-Month P/E Ratio
Zacks Investment Research
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Key Technical Indicator Signals Bearish Trend for SNPS
Synopsys' technical indicators suggest that further downside could be ahead. The stock has been trading below the 50-day moving average, a key technical level often used by traders to gauge short-term momentum. The combination of a high valuation and negative technical indicators suggests that Synopsys may face more volatility in the near term.
50-Day and 200-Day Moving Averages Signal Bearish Trend
Despite the short-term challenges, Synopsys remains well-positioned for long-term growth. It is tapping into several major trends that should drive demand for its products over the next few years, particularly the growing need for AI-driven semiconductor design.
The rise of AI has created an enormous demand for more sophisticated chips, which drives the need for advanced design tools. Synopsys excels in this area with its AI-powered tools like VSO.ai, which provide faster verification times and improved design accuracy. As companies continue to adopt AI, Synopsys stands to benefit from the growing demand for its design automation solutions.
Another major growth driver for Synopsys is its pending acquisition of ANSYS Inc., a leader in engineering simulation. This acquisition, expected to close in the first half of 2025, will broaden Synopsys' product portfolio and open up new markets in system-level design.
ANSYS’ deep expertise in physics simulation will complement Synopsys’ electronics design capabilities, enabling the company to offer an integrated suite of tools for industries that require highly complex system simulations, such as automotive, aerospace and industrial sectors.
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.
Partnerships with leading semiconductor designers and manufacturers have also enabled Synopsys to expand its expertise in AI-powered design automation tools. SNPS' AI-driven design flows gained certification on Samsung's SF2 process. It partnered with TSMC for advanced EDA, IP, and 3DFabric technologies.
Conclusion: Hold Synopsys Stock for Now
While Synopsys has experienced a sharp 22% decline in its stock price over the past year, the company’s long-term prospects remain promising. The slowing growth in its Design Automation segment and its current bearish technical indicators present some near-term challenges.
Despite these negatives, Synopsys' strong positioning in AI-driven semiconductor design and the potential boost from the pending ANSYS acquisition provide compelling reasons to hold on to the stock.
For current investors, holding Synopsys stock makes sense, given its leadership in key growth areas and its ability to innovate in semiconductor design. However, with the stock trading at a high valuation and negative technical signals looming, it may be wise to wait for signs of stabilization before considering adding more shares of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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