Why Synopsys Stock Popped Today
Key Points
Synopsys topped estimates for sales and earnings last night.
Demand for ever-more-complex AI semiconductors is driving sales for Synopsys.
Synopsys's reported GAAP earnings and its non-GAAP profits differ widely.
Synopsys (NASDAQ: SNPS) stock, which makes design and simulation software for pre-production work on semiconductors, soared 10.2% through 11 a.m. ET Thursday after beating analyst forecasts for fiscal Q3 sales and earnings last night.
Heading into the report, Wall Street had Synopsys pegged for $3.67 per share in pro forma profit on sales of just over $2.4 billion. Synopsys actually earned $3.91 per share on sales just under $2.5 billion.
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Synopsys Q3 earnings
Synopsys had a terrific Q3, with sales up 42.5% year over year and GAAP earnings twice that -- 89% -- to $2.84 per share. (The company's $3.67 number, remember, was non-GAAP.) CEO Sassine Ghazi observed that "AI is driving unprecedented complexity" in the design of new chips, increasing the need for Synopsys's software and contributing to revenue growth that exceeded even the high end of Synopsys's previous guidance.
Free cash flow is doing even better. Year to date, Synopsys has generated more than $2.1 billion in positive cash profits, which is more than three times the company's reported GAAP profit.
What's next for Synopsys stock?
Turning to guidance, management predicts Q4 sales slightly above Street targets, approaching $2.6 billion, with GAAP earnings per share ranging from $0.60 to $0.85.
Full-year sales should similarly surpass Street estimates, and could exceed $9.7 billion. GAAP profits for the year could be as high as $4.08, and non-GAAP earnings will almost certainly exceed $15 per share!
Given the wide divergence between GAAP and non-GAAP "earnings," investors may want to focus on the less malleable metric of free cash flow. With $2.1 billion to-date, Synopsys is on course to generate $2.6 billion through year-end. This gives Synopsys a price-to-free cash flow ratio of 33.3.
Expensive? Sure. But a company growing as fast as Synopsys may be worth it.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Synopsys. The Motley Fool has a disclosure policy.