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Synopsys (SNPS) Set on Growth Trajectory: Should You Hold?

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At times, it is prudent to retain stocks that have enough potential but are weighed down by tough market conditions. Synopsys Inc.SNPS seems to be one such stock, which investors need to hold on to if they are looking to reap long-term gains. Though the stock faces several headwinds now, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.

Further, Synopsys' stock price history reveals that the company hasn't been a disappointment in a long time. In fact, over the last one year, the shares of Synopsys have risen 57.67%, outperforming the Zacks Categorized Computer-Software industry, which has showcased on increase of just 24.47%.

Driving Factors

Synopsys posted impressive first-quarter fiscal 2017 results. Revenues as well as earnings improved year over year, mainly on the back of higher adoption of Synopsys' products and strength in hardware products.

Moreover, the company's second-quarter and fiscal 2017 guidance was encouraging.

Synopsys raised its fiscal 2017 outlook. The company now expects revenues to come in a range of $2.58-$2.61 billion (previous guidance $2.570-$2.600 billion) in fiscal 2017. The Zacks Consensus Estimate for revenues is pegged at $2.604 billion.

Non-GAAP earnings per share are now projected between $3.21 and $3.26 (previously $3.16 and $3.23). GAAP earnings per share are now projected in a range of $2.01 to $2.12 (previous guidance $1.92 - $2.06). The Zacks Consensus Estimate is pegged at $1.97 per share.

For the second quarter, the company expects revenues in a range of $665 million-$680 million (mid-point $672.5 million). The Zacks Consensus Estimate for revenues is pegged at $672 million. Management expects non-GAAP earnings per share in a range of 85 cents-88 cents, while GAAP earnings are projected between 51 cents and 59 cents. The Zacks Consensus Estimate for revenues is pegged at 56 cents per share.

Synopsys continues with its acquisition spree. The company recently declared that it has acquired certain assets of Forcheck b.v., a privately held software company in the Netherlands.

Synopsys in its press release revealed that "The acquisition of Forcheck technology provides Synopsys with unique capabilities and extends the utility of the Software Integrity Platform for organizations developing and maintaining critical infrastructure systems written in Fortan."

Therefore, we believe that Forcheck will enable Synopsys to offer a more comprehensive portfolio of software solutions. Moreover, through the acquisition, Synopsys will gain Forcheck customers, which will ultimately boost the top line.

Moreover, the stock looks attractive from a valuation perspective. This is because Synopsys currently trades at a forward P/E of 35.55x as against the industry group average of 62.10x, which signifies a huge upward potential.

The stock's long-term earnings per share growth rate is 8.79%.

Risks Persist

Competition from Cadence Design Systems Inc. CDNS and Mentor Graphics Corp. MENT , a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us on the sidelines.

Our Take

We expect the aforementioned factors to help the company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest that investors hold on to the stock as of now.

Stocks to Consider

A better-ranked stock in the technology sector is Seagate Technology plc STX , carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Seagate has a long-term expected EPS growth rate of 8.17%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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