Morningstar | We Think Software Integrity Adds a Degree of Differentiation for Synopsys
We are initiating coverage of Synopsys with a fair value estimate of $107, a narrow economic moat rating, and a stable trend rating. We view shares as modestly overvalued. Synopsys is a market leader in electronic design automation, or EDA, software and offers a broad set of design intellectual property, or IP, and leading software integrity tools that help customers design and verify integrated circuits or larger chip systems. With the chip design market facing the ongoing pressure of building smaller, faster, and more power efficient chips, demand for Synopsys’ sticky software and IP bodes well as the firm helps its clients offload this design expertise and meet these constant technology-driven expectations. We expect a stable competitive environment as Synopsys primarily competes against long established peers such as Cadence Design Systems and Mentor Graphics (owned by Siemens). We think Synopsys will grow its top line in the high single digits over the long term as solid demand for core EDA is supplemented with heightened IP and software integrity sales.We believe there are some positive secular forces that support Synopsys’ healthy long-term growth outlook. We think the firm is well positioned to benefit from developments surrounding new technological innovation related to artificial intelligence, the Internet of Things, and autonomous vehicles. These technologies are expected to further expand the firm’s userbase beyond traditional semiconductor companies. Meanwhile, outsourcing for complex IP will accompany these new technologies.
We don’t think there is a high amount of differentiation in core EDA tools provided by Synopsys, particularly when compared with Cadence. Therefore, in order to branch out, Synopsys entered the software integrity market in 2014 with its acquisition of Coverity. We think software integrity adds a degree of differentiation for Synopsys and the firm has been able to carve out a leadership role in this industry via internal development and M&A. With the amount of embedded software code in modern chip design proliferating, we believe the firm’s software will continue to be demanded as customers look to develop secure, quality code.
Synopsys is a supplier of electronic design automation (EDA) software that engineers use to design and test integrated circuits. The company also provides semiconductor intellectual property products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The company provides software and hardware used to validate the electronic systems that incorporate chips and the software that runs on them. The company is also a provider of software tools and services that improve the security and quality of software code in a variety of industries, including electronics, financial services, media, automotive, medicine, energy and industrials.
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