Story Stocks^®

Shares of the electronic design automation software supplier Synopsys (SNPS -12%) slide today despite a decent-sized Q4 (Oct) earnings beat and a continuously robust AI-related landscape. Today's setback stems from SNPS's bearish Q1 (Jan) guidance and mild FY25 outlook. The company guided for the year pragmatically due to unevenness across end-market and geographical demand.

Management characterized its current backdrop as a tale of two markets. Customers serving the AI infrastructure buildout have been doing incredibly well, benefiting SNPS significantly. However, the rest of the semiconductor market, including customers serving mobile, PC, automotive, and industrial, is still amid a refresh cycle. Since SNPS is still tied to these customers' R&D, it is surviving but not registering growth levels similar to those of the other AI-centric customer cohort. Meanwhile, China remains a headwind as SNPS deals with expanding trade restrictions while the economy decelerates.

These factors contributed to a balanced view of FY25. SNPS targeted adjusted EPS of $14.88-14.96, the midpoint exceeding consensus, and revenue growth of +10.1-11.1% yr/yr or $6.745-6.805 bln, falling short of consensus. It is worth pointing out that if not for the impact of an extra week and calendar year change, SNPS projected +11.5-12.5% yr/yr revenue growth for FY25, the high-end meeting analyst expectations.

• Demand unevenness was prevalent in Q4. SNPS topped earnings expectations for back-to-back quarters but saw revenue growth continue to slow, expanding by just 2.3% yr/yr to $1.64 bln compared to jumps of +12.7%, +15.2%, and +21.1% over the previous three quarters.
• Leading growth in Q4 was SNPS's Design Automation business, with revs up 17% yr/yr, showcasing the strong appetite for AI. SNPS has constantly added AI optimization engines to its products, helping customers extract improvements in hardware utilization and turnaround times. Meanwhile, multi-die designs are opening a new frontier in chip architecture. SNPS stated that 90% of high-performance computing designs and 70% of PC designs will be multi-die within two years.
  • Furthermore, on multi-die, SNPS stated that a design environment combining design automation and multi-physics simulation will be the real game-changer and a key component of the value proposition for its pending acquisition of Ansys (ANSS), which is scheduled to close during 1H25.
• SNPS's Design IP business pulled down overall revenue, delivering roughly flat yr/yr growth in the quarter. Most of the company's IP business stems from customers designing on chips produced by Taiwan Semi (TSM), which includes numerous verticals, from manufacturing to automotive to smartphones. These end markets are still in recovery mode, keeping revenue suppressed. IP will remain lumpy heading into Q1, causing SNPS's outlook for the quarter, including adjusted EPS of $2.77-2.82 and revs of $1.435-1.465 bln to fall short of analyst expectations.

Disappointing FY25 guidance branching from a combination of gradually recovering end markets and uncertainty surrounding China sparked considerable selling pressure today. While these variables may continue to cast a cloud on future results, SNPS remains bullish on AI, remarking that the technology is merely at its beginning stage and will become an essential component of everything the company does.