At times, it is prudent to retain certain stocks that have enough potential but are weighed down by tough market conditions. Synopsys Inc. SNPS seems to be one such stock, which investors need to hold on to if they are looking to reap long-term gains. Though the stock faces several headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.
Further, Synopsys’ stock price history reveals that the company hasn’t disappointed in a long time. In fact, so far this year, shares of Synopsys have risen 25.2%, outperforming the Zacks Categorized Computer-Software industry, which has showcased an increase of just 6.3%.
What’s Going in Synopsys’ Favor?
Synopsys posted better-than-expected fourth quarter of fiscal 2016 results. Also, fourth quarter revenues as well as earnings improved year over year, mainly on the back of higher adoption of Synopsys’ products and strength in hardware products.
Moreover, the company provided encouraging first quarter and fiscal 2017 guidance. The company expects fiscal 2017 revenues to come in the range of $2.570–$2.600 billion. The Zacks Consensus Estimate for revenues is pegged at $2.585 billion.
Non-GAAP earnings per share for fiscal 2017 are projected between $3.16 and $3.23. The Zacks Consensus Estimate is pegged at $1.98 per share.
For the first quarter, the company expects revenues in the range of $630 million–$645 million. The Zacks Consensus Estimate for revenues is pegged at $638 million. Management expects non-GAAP earnings per share in the range of 77 cents–80 cents, higher than the Zacks Consensus Estimate of 48 cents per share.
Moreover, the stock looks attractive from a valuation perspective. This is because Synopsys currently trades at a forward P/E of 27.15x as against the industry group average of 41.50x, which signifies a huge upward potential.
The stock’s long-term earnings per share growth rate is 9% and it carries a VGM Score of “B.”
Concerns Remain
Competition from Cadence Design Systems Inc. CDNS and Mentor Graphics Corp. MENT, a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us cautious.
Our Take
Synopsys is a vendor of electronic design automation (EDA) software to the semiconductor and electronics industries. We believe the company’s recent product launches, acquisitions and deal wins will boost results, going ahead. Moreover, unique intellectual properties and global support provided by the company will likely drive its forthcoming results.
We expect the aforementioned factors to help the company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors hold on to the stock as the rest is a wait-and-watch story.
Stock to Consider
A better-ranked stock in the broader technology sector is Cirrus Logic Inc. CRUS, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here
Cirrus Logic has a long-term earnings per share growth rate of 17.5%.
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