Synopsys Hits 52-Week High On Acquisitions & Q2 Results

Shares of Synopsys Inc. (NASDAQ:SNPS) hit a new 52-week high of $53.46 on Jun 8, eventually closing at $53.44. The shares have been particularly buoyant in recent times, jumping 11.4% over the past one month. The closing share price also represents a decent one-year return of 6.4% and a year-to-date return of 17.2%.

The price increase was supported by a significant rise in share volume. Average volume of shares traded over the last 10 days (799K) increased substantially from the 775k average volume of shares traded over the last three months.

What is Driving the Stock Upward?

This price appreciation can be attributed to the recently announced buyout of Gold Standard Simulations Ltd. (NYSE:GSS) . The acquisition is in line with Synopsys’ continued investments toward enhancing its electronic design automation (EDA) software product portfolio. Synopsys sells EDA software to the semiconductor and electronics industries. In the current economic scenario, customers are strengthening their supplier relationships while focusing on cost efficiencies, which have led many to select Synopsys as their primary EDA partner.

Also, the company has acquired Simpleware – a privately owned company that specializes in developing software products that help convert “3D scan data into high-quality computer models used for engineering design and simulation”. The transaction will not only enhance Synopsys’ product portfolio, but also expand its customer base, thereby boosting the top line.

It is also worth noting that Synopsys’ share price has been increasing continuously since the company reported better-than-expected second-quarter fiscal 2016 results on May 18. Also, second quarter revenues saw a year-over-year improvement, mainly on the back of higher adoption of Synopsys’ products and strength in hardware products. Moreover, the company provided an encouraging third quarter guidance and raised its fiscal 2016 guidance.

For fiscal 2016, the company now expects revenues in a range of $2.360–$2.400 billion (previously $2.350–$2.390 billion). The Zacks Consensus Estimate for revenues is pegged at $2.386 billion. Non-GAAP earnings per share are now projected between $2.95 and $3.00 (previously $2.93 and $3.00). The Zacks Consensus Estimate for earnings is pegged at $1.72 per share. The company projects cash from operations in the range of $510 million to $530 million (previously $500 million).

For third-quarter fiscal 2016, the company expects revenues in the range of $595–$610 million (mid-point $602.5 million). The Zacks Consensus Estimate for revenues is pegged at $603 million. Management expects non-GAAP earnings per share in the range of 72–75 cents, higher than the Zacks Consensus Estimate of 43 cents.

With respect to earnings surprise, this Zacks Rank #1 (Strong Buy) stock has surpassed the Zacks Consensus Estimate in three out of the last four quarters with an average surprise of 18.8%.

Moreover, the stock looks attractive from a valuation perspective. This is because Synopsys currently trades at a forward P/E of 30.67x as against the industry group average of 104.90x, which signifies a huge upward potential.

We are positive that the company’s recent product launches, acquisitions and deal wins will boost results, going forward. Moreover, the unique intellectual properties and global support provided by Synopsys will likely drive forthcoming results. The company has a good cash reserve that is necessary for funding further acquisitions. Additionally, the company’s acquisition of Coverity will expand its reach in the software quality, testing and security tools market.

However, competition from Cadence Design Systems Inc. (NASDAQ:CDNS) and Mentor Graphics Corp. (NASDAQ:MENT) , a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us on the sidelines.