SNPS Stock Plunges 25% in 3 Months: Should You Buy, Sell or Hold?

Synopsys SNPS stock has lost 25.3% in the past three months, underperforming the Zacks Computer - Software industry’s return of 1.4%. This sharp decline in the share price of this EDA vendor raises the question: Should investors hold on or exit the stock?

SNPS YTD Performance Chart

Let’s break down the fundamentals, growth prospects, market challenges and valuation to determine if SNPS offers an investment opportunity right now or is it a risky bet?

SNPS Pushes Into the AI-based EDA Products to Drive Growth

Synopsys’ AI-driven electronic design automation (EDA) tools like Synopsys.ai, Fusion Compiler, PrimeTime, IC Validator, and StarRC are being rapidly adopted as customers are experiencing massive productivity gains from their implementation.

Synopsys is also expanding in the AI cluster interconnect market with launches, including Ultra Accelerator Link and Ultra Ethernet IP solutions, and it’s expected to benefit from the expanding Data Center Interconnect market, which is projected to reach $25.89 billion by 2030, witnessing an 11% CAGR from 2025 to 2030, per a report by MarketsAndMarkets.

Numerous companies have selected Synopsys as their primary EDA partner. Relationships with companies, such as Advanced Micro Devices, Juniper Networks, Realtek, Teradici, NetLogic Microsystems, Toshiba and Wolfson stand as evidence. AI-chip developers are implementing the ZeBu Server 4 design emulation system for speeding up their System-on-Chip verification.

Synopsys’ software-based verification tools are gaining traction at both traditional semiconductor and emerging system companies. Since advanced nodes require precise verification, sign-off, and simulation, directly boosting software demand and licensing revenues, many companies are adopting SNPS’ EDA products.

With all these offerings in its portfolio, SNPS is set to capitalize on the growing HPC and AI market, which requires high-speed, low-latency interconnects to link accelerator clusters. The Zacks Consensus Estimate for SNPS’ fiscal 2025 revenues is pegged at $7.05 billion, indicating year-over-year growth of 12.5%.

SNPS Faces Competitive Challenges in Networking and EDA Space

SNPS faces a major threat from the Ultra Ethernet Consortium and companies like Broadcom AVGO and Marvell Technology MRVL. Synopsys also faces competition from EDA vendors, such as Cadence Design Systems Inc. CDNS and Siemens.

Broadcom develops networking ASICs, Ethernet switches, and PHYs that dominate data centers. Broadcom also builds custom silicon for hyperscalers like Google and Meta, proving that the company has a deep, in-house interconnect IP and is not reliant on third-party IPs from Synopsys.

Cadence Design System provides EDA tools, such as software, hardware, and services, essential for designing chips and semiconductor devices. Cadence offers products focused on distinct phases of the IC design process and provides a range of services to companies worldwide to help optimize their product development process, among other things.

Similarly, Marvell Technology develops custom ASICs, DPU/NIC chips, and SerDes PHY IP used in AI and HPC interconnects. Marvell Technology provides integrated interconnect and compute chips to hyperscalers. Marvell Technology’s co-packaged optics and chiplet interconnect technology directly challenge Synopsys in the interconnect market.

The presence of stiff competition due to these players is forcing SNPS to increase its Marketing and Research expenses to stay ahead, resulting in margin compression. The Zacks Consensus Estimate for SNPS’ fiscal 2025 earnings is pegged at $12.8 billion, indicating a year-over-year decline of 2.8%.

SNPS Faces Challenges in Design IP Business

SNPS’ Design IP business declined 8% year over year due to foundry customer delays and internal resource allocation missteps. On the earnings call, management noted a “muted year” ahead for Design IP, signaling sustained pressure into fiscal 2026.

Synopsys is facing pressure on its operating margins due to weakness in its Design IP business. Synopsys also remains exposed to geopolitical risks, particularly in China, which continue to weigh on its business outlook.

Compounding the issue, management warned of a compression in margins in the fourth quarter. Management also stated that additional debt to finance the Ansys acquisition would weigh on free cash flow. These factors cast doubt on Synopsys’ near-term growth and profitability trajectory.

SNPS Shares are Overvalued at Present

SNPS is currently trading at a premium valuation, with its forward 12-month price-to-sales (P/S) ratio at 8.83X, which is higher than the Zacks Computer - Software industry’s average of 8.54X. This is also reflected in the Zacks Value Score of the stock, as it carries a Value Score of F.

SNPS Forward 12 Months (P/S) Valuation Chart

Conclusion: Sell SNPS Stock Now

Although SNPS is investing heavily in the AI-based EDA and AI-cluster interconnect solutions, its lofty valuation, declining margins, rising competition and muted Design IP business are major headwinds, which might dissuade investors. Considering all these factors, we suggest investors stay away from this Zacks Rank #5 (Strong Sell) stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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