With a daily gain of 1.79%, a 3-month gain of 4.25%, and an Earnings Per Share (EPS) (EPS) of 6.67, Synopsys Inc (SNPS, Financial) has been showing promising performance. However, the question remains: Is the stock modestly overvalued? This article provides an in-depth valuation analysis of Synopsys, shedding light on its intrinsic worth. Let's delve into the details.
Company Introduction
Synopsys Inc (SNPS, Financial) is a renowned provider of electronic design automation software, intellectual property, and software integrity products. Its Electronic Design Automation (EDA) software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. Synopsys's growing Software Integrity (SI) business enables customers to continuously manage and test the code base for security and quality.
As of September 18, 2023, Synopsys's stock price stands at $460.01, while its GF Value, an estimation of fair value, is $406.12. This discrepancy indicates that the stock might be modestly overvalued. To understand why, we need to examine the company's financial performance and market trends.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, Synopsys (SNPS, Financial) appears to be modestly overvalued. With a current price of $460.01 per share and a market cap of $70 billion, the future return of Synopsys is likely to be lower than its business growth due to its overvaluation.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before buying its shares. Synopsys has a cash-to-debt ratio of 2.66, ranking better than 50.38% of 2755 companies in the Software industry. This strong balance sheet earns Synopsys a financial strength rank of 9 out of 10.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. Synopsys has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.50 billion and Earnings Per Share (EPS) of $6.67. Its operating margin is 20.52%, ranking better than 89.84% of 2747 companies in the Software industry. Overall, the profitability of Synopsys is ranked 9 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. Synopsys's 3-year average revenue growth rate is better than 64.07% of 2413 companies in the Software industry. Synopsys's 3-year average EBITDA growth rate is 20.4%, ranking better than 67.98% of 2008 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) with the weighted cost of capital (WACC) provides another perspective on its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate a company is expected to pay on average to all its security holders to finance its assets. Synopsys's ROIC for the past 12 months is 12.41, and its WACC is 10.97.
Conclusion
In conclusion, Synopsys (SNPS, Financial) stock appears to be modestly overvalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 67.98% of 2008 companies in the Software industry. To learn more about Synopsys stock, you can check out its 30-Year Financials here.
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