In the vast and intricate web of the semiconductor industry, a myriad of companies plays pivotal roles, yet not all receive the spotlight they deserve. Among these unsung heroes is Synopsys, a firm that, despite not generating the widespread buzz typically associated with AI-chip designers, is fundamentally crucial to the sector. The company’s prowess lies in its electronic automation design (EDA) software, an essential tool in the creation of a wide array of chips. This underlines the importance of understanding Synopsys’s position in the industry, not only for its technological contributions but also as a potential opportunity for investment.
Despite its significant role, Synopsys has grappled with underwhelming stock performance as of late. By the closing session on June 11, the company’s shares had declined by roughly 13% over the preceding year. The firm’s challenges have been compounded by recent geopolitical developments, including tensions between the United States and China, as well as policies implemented during the Trump administration. These factors beg the question: amidst these tumultuous times, can Synopsys navigate the storm and continue to offer significant value to its shareholders in the long term?
In a move that sent shockwaves through the financial markets on May 28, Synopsys’s shares plummeted nearly 10%. This downturn was triggered by an announcement from the Trump administration, decreeing that Synopsys, along with other EDA companies, were to cease their sales operations in China. Given that approximately 10% of Synopsys’s revenue was derived from the Chinese market in the last quarter, the implications of this mandate were far from negligible. This action by the U.S. government underscored a strategic desire to impede China’s advancement in semiconductor technology by restricting access to Synopsys’s innovative software solutions.
Despite the unsettling news, Synopsys demonstrated resilience by posting solid financial results on the same day, surpassing analysts’ expectations in both sales and adjusted earnings per share, which saw increases of 10% and 22% respectively, compared to the same quarter of the previous year. However, the company faced uncertainty following the administration’s restrictions, leading to a suspension of its fiscal Q3 and full-year 2025 financial guidance after receiving official notice of the sales embargo.
The embargo, while concerning, might not be as detrimental to Synopsys’s financial health as it initially appears. The company observed a decrease in its revenue contribution from China, falling from 15% to 10% in the last quarter, relegating it to the smallest among its reported segments. This decline is attributed to ongoing trade restrictions that have gradually reduced the pool of potential Chinese customers. This trend suggests that the impact of the new restrictions might be somewhat mitigated by the company’s diminishing business interests in China.
Another plot twist in the Synopsys narrative is its planned acquisition of ANSYS, announced in January 2024 for a staggering $35 billion. However, the completion of this transaction hangs in the balance, awaiting regulatory consent, particularly from Chinese authorities. This situation presents a complex conundrum: with Synopsys’s diminished presence in China, the outcome of the deal could potentially be swayed by geopolitical factors and trade negotiations between the U.S. and China.
Despite the near-term uncertainties shadowing Synopsys, analysts from KeyCorp have set an optimistic price target of $540 on the stock, implying an 8% upside from its June 11 closing price. This cautious optimism is fueled by the belief in the company’s enduring prospects. The eventual approval of the ANSYS acquisition is anticipated to bolster Synopsys’s competitive edge significantly.
Moreover, the semiconductor industry is witnessing a broader secular trend towards the development of increasingly advanced chips across various markets. This evolution promises to offer long-term growth opportunities for Synopsys, as its EDA software remains integral to these advancements. In addition, there’s potential for recovery in non-AI end markets, which have seen some decline but remain crucial to the industry’s ecosystem.
In essence, Synopsys stands at a critical juncture, facing both immediate challenges and the prospect of significant opportunities. While the current geopolitical climate and trade disruptions pose tangible hurdles, the company’s strategic manoeuvres and the inherent strength of the semiconductor industry’s growth trajectory suggest a promising horizon. As such, Synopsys represents not just a key player in the technology that powers our world but also a potentially sage investment in the ever-evolving landscape of global tech innovation.
Despite receiving only a fraction of the attention of AI-chip designers, Synopsys (NASDAQ:) is a company deeply important to the semiconductor industry. Synopsys’s electronic automation design (EDA) software is essential to developing these and many other chips, making it an important part of the industry to understand and potentially invest in.
However, Synopsys shares have seen disappointing performance recently. As of the June 11 close, they are down approximately 13% over the past 52 weeks. Recent news related to China and Trump isn’t helping. So, what are the recent developments surrounding Synopsys? Additionally, does this vital company still have the potential for significant long-term share price appreciation?
Synopsys Gets Whacked as Trump Shuts Down EDA Sales to China
On May 28, shares of Synopsys dropped nearly 10%. This was in reaction to news that the Trump administration ordered Synopsys and other EDA companies to halt sales to China. This would be far from a trivial loss of business for Synopsys. Around 10% of the company’s revenue came from China last quarter. The restriction underscores Synopsys’s importance in developing advanced chips. U.S. government officials see cutting China off from Synopsys’s software as a way to slow their development of this technology.
This was a dark cloud that hung over the company’s solid financial results, which came out the same day after the market’s close. The company beat estimates on sales and adjusted earnings per share (EPS). The two figures grew by 10% and 22% from the previous year’s quarter, respectively.
Synopsys said on the earnings call that it had not received a notification of this restriction from the administration. However, that notice came the next day. This led the company to suspend its fiscal Q3 and full-year 2025 guidance.
Although this restriction is certainly not good news for Synopsys, it also isn’t the backbreaker it may initially seem. The company’s revenue contribution from China declined from 15% in fiscal Q2 2024 to 10% last quarter. Now, the geography is the smallest contributor of the five it reports.
Trade restrictions involving China are not new to the company. Sales growth in the country has been decelerating for years. This is because past restrictions have shrunk the pool of Chinese customers it can sell to.
This shows that China was already a declining business for Synopsys, softening the blow of this new restriction. Another very important issue to address is the company’s planned acquisition of ANSYS (NASDAQ:).
ANSYS Deal Approval Gets a New Wrinkle
Synopsys first announced its deal to acquire ANSYS back in January 2024 for $35 billion. However, the company is still waiting for regulatory approval on the deal. Chinese regulators remain the only group that has yet to approve it. There has been some speculation that the deal could be approved sooner, as the company will no longer be doing business in China.
At the Bank of America Global Technology Conference 2025 on June 4, the company noted that some have implied the ANSYS deal could get done “this week.” However, this would seemingly require the company to decide it no longer needs approval from China.
Synopsys pushed back on the idea that it would consider this. China-U.S. trade negotiations could progress in a way that restores Synopsys’s ability to sell in China. Moving forward with the acquisition without China’s approval could greatly damage its chances of reentering the Chinese market.
So, Synopsys is still seeking the necessary approval from China. It is anticipated that this approval would come in the first half of 2025. With the new trade restrictions, there is a possibility that China’s stance on the deal will harden. It could try to use it as a bargaining chip in trade negotiations.
SNPS: Near-Term Uncertainty, But Secular Trends Are Too Big to Ignore
Since Synopsys suspended its guidance, analysts at KeyCorp (NYSE:) set a price target of $540 on the stock. This implies an 8% upside compared to the company’s June 11 closing price. This indicates a very moderate amount of upside potential, and the ANSYS deal provides a near-term headwind for Synopsys.
However, the company’s long-term prospects remain strong. The ANSYS deal will likely go through eventually, which will significantly aid the company’s competitive position.
Additionally, the company stands to benefit from a recovery in non-AI end markets that have experienced a decline for some time now.
More generally, the secular trend in developing more and more advanced chips across end markets sets the stock up for long-term success.
