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Synopsys (SNPS) Set to Beat Market: Time to Buy the Stock

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Synopsys (SNPS - Free Report) is one such stock investors should consider adding to their portfolio to shrug off the current highly volatile market environment and make some gains from its upside potential.

Wall Street has been witnessing high volatility since the beginning of 2022 due to multiple factors, including the pandemic, rising inflationary concerns, increasing crude oil prices and a shift in Fed’s policy to a tougher-than-expected line. The ongoing Russia-Ukraine war further increased worries for investors about the global economic recovery.

The aforementioned global macroeconomic and geopolitical uncertainties are likely to continue weighing on investors’ sentiments, which can result in more volatility in the U.S. equity market. Year to date, the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 have plunged 9.4%, 22.8% and 13.7%, respectively.

In such a scenario, growth-rated stocks, such as Synopsys, can boost one’s portfolio. SNPS has outperformed the Zacks Computer-Software industry in the past year. The stock has rallied 23.2% in the trailing 12 months, while the industry has declined 4.1%.

Zacks Investment Research
Image Source: Zacks Investment Research

Why Invest in Synopsys Stock?

Amid the ongoing economic and financial instability, it is prudent to pick solid growth companies as these are financially stable, accruing profits in established markets. These stocks with their solid fundamentals allow investors to hedge their funds from any economic downturn.

Apart from having solid fundamentals, Synopsys has the favorable combination of a Growth Score of A and a Zacks Rank #2 (Buy).

Per Zacks’ proprietary methodology, stocks with a combination of a Zacks Rank #1 (Strong Buy) or #2 and a Growth Score of A or B offer solid investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Synopsys has an impressive earnings surprise history. The company outpaced estimates in all the trailing four quarters, delivering an average earnings surprise of 2.7%. Additionally, the stock has an impressive long-term earnings per share (EPS) growth expectation of 19.6%.

The Zacks Consensus Estimate of $8.47 per share for fiscal 2022 earnings suggests growth of approximately 23.8% from the year-ago period. For fiscal 2023, the consensus mark for earnings is pegged at $9.79, indicating a year-over-year increase of 15.6%.

Last month, Synopsys reported strong second-quarter fiscal 2022 results, wherein its revenues soared approximately 25%, while the EPS jumped 47% on a year-over-year basis. The second-quarter performance reflected the benefits of the solid demand for its products amid the rapid adoption of Big Data, faster computation and Machine Learning.

Strong Fundamental Drivers

Synopsys is benefiting from strong design wins due to a robust product portfolio. The growth in the work-and-learn-from-home trend is driving the demand for bandwidth. The emerging clout of AI, 5G and advanced driver-assistance systems chip-set making is fueling the demand for computational software tools, which favors Synopsys’ prospects. Given the company’s capability to cater to the growing complex design requirements of customers, we believe SNPS is well-poised to capitalize on this opportunity.

Furthermore, the company’s latest collaboration with Juniper Networks (JNPR - Free Report) to form a separate entity to provide an open silicon photonics platform is likely to open new avenues of growth for Synopsys.

Silicon Photonics is currently an evolving technology under which data is transferred through optical rays among computer chips, which can carry far more data at a faster speed than conventional electronic circuits. Also, silicon photonics consumes less power and generates less heat than electrical conductors. Therefore, it is more energy-efficient and cost-effective.

The silicon photonics market is witnessing significant growth for the past few years, mainly driven by the increased demand for high bandwidth and high data transfer capabilities. An increase in the deployment of the 5G network is anticipated to further boost silicon photonics’ demand. According to the MarketsandMarkets report, the silicon photonics market is anticipated to increase at a CAGR of 26.8% and reach $4.6 billion by 2027 from $1.1 billion in 2021.

Therefore, by forming a separate photonics company, Synopsys and Juniper Networks are trying to tap the rapidly growing opportunities in the silicon photonics market.

Other Stocks to Consider

Some other top-ranked stocks from the broader technology sector worth considering are ON Semiconductor (ON - Free Report) and Analog Devices (ADI - Free Report) , each sporting a Zacks Rank #1.

The Zacks Consensus Estimate for ON's second-quarter 2022 earnings has been revised to $1.26 per share from $1.04 over the past 60 days. For 2022, earnings estimates have moved north by 18% to $4.91 per share in the past 60 days.

ON's earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 2.8%. Shares of ON have rallied 68.9% in the past year.

The Zacks Consensus Estimate for Analog Devices' third-quarter fiscal 2022 earnings has been revised upward by 24 cents to $2.42 per share over the past 30 days. For fiscal 2022, earnings estimates have moved north by 9.6% to $9.24 per share in the past 30 days.

Analog Devices' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 7.7%. Shares of ADI have decreased 1.4% in the past year.