UPDATE: Deutsche Bank Starts Synopsys (SNPS) at Buy

(Updated - September 28, 2022 5:37 PM EDT)

Deutsche Bank analyst Gianmarco Conti initiates coverage on Synopsys (NASDAQ: SNPS) with a Buy rating and a price target of $420.00.

The analyst comments "Competitive advantage in digital design and first-mover advantage in AI to be net positive for revenue growth: Synopsys has a competitive advantage in Digital IC design as it as historically held a leading position and it currently holds circa 70% of the digital EDA design market. Its competitive advantage in digital, its first-mover advantage in AI-driven EDA solutions, and the underlying demand for advanced SoCs from IoT, 5G and automotive (EV/AV) are all considered in our revenue growth forecast of ~13% for FY22- 25. Furthermore, we note that Synopsys holds long-standing relationships with customers such as Intel, where its revenue exposure is ~10%; Intel spends a disproportionate amount of its EDA budget on Synopsys vs. other players. Our channel checks support our thesis that Synopsys is widely adopted for Intel's front-end tools (RTL abstraction, conversion to netlist, functional verification, etc.), while Intel on occasion also uses some inhouse developed tools for back-end design (place and route, physical verification, etc.). Synopsys was founded on its logic synthesis roots, and has held a leading edge here ever since. Breaking down the many tailwinds that are driving demand in advanced chip design, we highlight the automotive industry. We believe there is particularly strong demand for Synopsys' DesignWare ARC processor solution used for automotive SoCs. The underlying trends identified by IHS Markit further show how 86% of semi companies' CapEx in developing automotive chips in FY21/22e is being poured into advanced nodes, most of them digital. On top of having a market-leading position in digital design, we estimate that an increasing part of Synopsys' revenue growth should come from AI-enabled EDA tools. Synopsys was the first company to officially place a product on the market with DSO.ai in March 2020; Cadence followed a year later in July 2021 with Cerebrus. Based on the most recent earnings call, we note that the use of AI in EDA design is currently at the production level, not proof-of-concept. Two of the largest semi customers are currently using this to automate many design workflow tasks, in some cases helping compensate for the talent shortage of engineers. From a market perspective, Semico research found that AI-enabled EDA tools allow for a ~21% reduction in SoC costs. The research expects AI penetration to grow to >46% by 2025, from a mere 6% in 2020. Although these are mostly thematic points, we expect the underlying trends for digital growth, AI adoption, the competitive advantage in front-end tools, and a deep partner network to all be growth and margin accretive going forward. This is reflected in our 11% FY22-25 CAGR forecast for EDA and margin expansion of 125bps p.a."

For an analyst ratings summary and ratings history on Synopsys click here. For more ratings news on Synopsys click here.

Shares of Synopsys closed at $306.09 yesterday.

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