Claims of a potential investigation into collusion between Synopsys, Inc. (NASDAQ: SNPS) and Huawei Technologies and Semiconductor Manufacturing International Corp (OTCQX: SIUIF) could be a disruption situation due to the national threat issue pointed out by the US government. The pertinent question in the minds of investors is why would a $ 48 billion company do it while knowing the risks involved? While it doesn’t sound good, Synopsys clearance will make the title bounce. Synopsys prides itself on the hallmark of the world’s most advanced chip design and verification technology. At the heart of its silicon production is the delivery of Smart Everything to customers.
At present, silicon and semiconductor technology are the foundation for digital transformation. Synopsys continues to improve its software ecosystem, as evidenced by strong first quarter 2022 earnings reflecting the growth in EDA software supply. The company has seen increased demand for IP and hardware, including semiconductors. With software integrity exceeding estimates, the company is confident it will reach its 15% to 20% growth target in 2022, including multi-year margins. With the outcome of the Fed investigation into Synopsys still under discussion, I will explain why this stock is a drag.
In the first quarter of 2022, Synopsys reported a 10.24% increase in revenue to $ 1.27 billion from $ 1.152 billion in the fourth quarter of 2021. GAAP (diluted) EPS also increased 56.7% to $ 1. 99 from $ 1.27 recorded in October 2021. This revenue increase is the result of heavy investments in exclusive product innovations, targeted apps and technical differentiation over the past 5 years. Synopsys also has a solid cash position at $ 1.27 billion against a total debt level of $ 580.60 million.
Market dynamics synopsis
The company also attributed a strong semiconductor market to the good results, increasing differentiation in technology and product execution. The global semiconductor market, which stood at $ 452.25 billion in 2021, is set to reach $ 803.15 billion in 2028, growing at a CAGR of 8.6%. In addition to the rise in consumer electronics consumption, the growth of the industry will be spurred by the adoption of artificial intelligence (AI), the Internet of Things (IoT) and machine learning (ML) technologies.
Except for NVIDIA (NVDA), Synopsys’ market capitalization has far outstripped semiconductor powerhouses in the world such as Taiwan Semiconductor Manufacturing Co (TSM) over the past five years.
Over the past five years, TSM’s market cap has grown 216.75%, while NVIDIA is up 838.35%.
Interestingly, Synopsys’s price return over the past five years has been over 310% almost similar to its rate of market cap growth. Intel Corporation (INTC) experienced the slowest growth rate at 12% as the company is still reeling from supply bottlenecks related to chip and computer manufacturing. The companies are believed to operate on the critical importance of chips and electronic devices among customers who continue to show recurring positive revenues.
However, the modern world has seen huge investments from AI startups and hyper-scalers prioritizing design activities. In his Q1 2022 earnings call, SNPS CEO Aart de Geus said his award-winning DSO.ai solution is a self-contained system that drives tools into the design space. DSO.ai’s main feature of accelerating chip performance has seen its product design adopted by 5 of the top 10 leaders in the semiconductor industry.
In my view, the practicality of DSO.ai makes it a formidable contender in the critical section of Synopsys’ revenue stream. It helps in the optimization of the deep design space due to its feature of exploiting cloud computing. In late 2021, Synopsys announced that its DSO.ai has achieved the highest frequency and lowest power consumption for advanced mobile designs for Samsung (OTC: SSNLF).
As the leader in electronic design automation (EDA), I believe the $ 50 million increase in revenue for the second quarter of 2022 is modest, to say the least. First and foremost as a market leader in the supply of EDA tools and technologies, Synopsys controls a whopping share of the $ 8.9 billion markets. Its innovative products include DC NXT, TestMAX and IC Validator NXT. Delivers market leadership with AI-powered tools and cloud-ready AI-powered apps.
EDA tools contribute up to 65% of Synopsys revenue after a 35 year investment and execution. The company is a strong provider of semiconductor IP, an industry it has invested in for 20 years and contributes 25% to its revenue. As an emerging leader in software integrity, Synopsys has invested up to 7 years in the industry which now contributes up to 10% of the company’s revenue. Over the final twelve-month (TTM) period towards 2022, its total contribution amounted to $ 400 million, indicating a significant share of revenue for the year.
As the world’s largest provider of EDA software used in chip design, Synopsis is partnering with Microsoft (MSFT) to launch Synopsys Cloud. This solution will run on the Microsoft Azure Cloud service to give chip engineers on-demand access directly from the cloud. What we do know is that modern chip design takes several years with engineers tasked with using EDA software to automate the steps. It is a complicated 3D design process that requires multiple IT and EDA resources. Using Synopsys, Microsoft customers will have simplified access to custom infrastructure for all chip design requirements.
After raising annual revenue of $ 4.20 billion in fiscal 2021, Synopsys has set its goal for fiscal 2022 between $ 4.775 billion and $ 4.825 billion (a growth rate of 14% -15%).
Synopsys revenue growth since October 2017 of more than 14% with projections showing it will reach $ 5.35 billion by the fourth quarter of 2023. To ensure the success of the recurring revenue model, Synopsys hopes to advance its non-recurring backlog. cancellable until 2023. As of the first quarter of 2022, the company posted a backlog of $ 6.9 million. This backlog will provide financial stability throughout the business cycle as the company continues to invest in long-term growth.
In its future Smart Everything, Synopsys is looking to design a new electronic architecture that will integrate intelligent computing and sensors. Part of the high-impact markets that will benefit from this redesign is the Internet of Things (IoT), where the smart home and wearable devices industries are attracting various customers across all segments.
In the artificial intelligence market, the deep learning chipset industry is projected to reach $ 72 billion by 2025.
Synopsys’ software integrity business segment, which contributes up to 10% of the company’s revenue, faces the headwinds of product and service security testing. Security vulnerabilities continue to persist even in the open source software segment. In a report called “2022 Open-Source Security and Risk Analysis” (OSSRA) Synopsys determined that outdated open source software had several operational and maintenance vulnerabilities.
In the report, it was stated,
The fact remains that over half of the code bases we checked still contained license conflicts and nearly half still contained high-risk vulnerabilities. Even more troubling was that 88% of the code bases [with risk assessments] contained outdated versions of open source components with an available update or patch that had not been applied. “
However, the company reiterated the importance of maintaining an accurate and up-to-date inventory of the open source software used in its code to reduce the vulnerability option.
The outcome of the US Department of Commerce investigation into Synopsis’ possible technology transfer to Huawei and SMIC could damage the company’s reputation, especially if indicted.
Synopsys continues to enjoy perpetual revenue growth with the second quarter expected to provide up to $ 50 million in revenue guidance. The company is a market leader in providing EDA and is emerging as a major competitor in providing software integrity services despite the challenges of open source software. We believe the ongoing investigation to establish the technology transfer to Huawei and SMIC will have a significant impact on the stock’s performance going forward. For these reasons, we propose a hold rating for the stock.