Increased Industry Attention A Positive For Synopsys

D.A. Davidson sees increased attention from electronic design automation (EDA) software industry on Synopsys, Inc. (NASDAQ: SNPS). Following volatile conditions, the EDA space is gaining traction to a stability thus enhancing cash flow. As a result, the firm boosted the target price from $64 to $75 while reiterating its Buy rating on the stock.

Analyst Thomas Diffely thinks that fundamentals of the industry remain intact and consistent financial metrics are driving valuation higher. He sees investors gaining confidence on EDA shares for the long term, citing strong operating models with consistent cash flow generation.

In a research note, the brokerage said, "EDA names, however, still trade at a significant discount (30–50+ percent) to other engineering software names (such as ANSS & ADSK), even though EDA software is critically important to design even the simple semiconductor chips that are pervasive in this increasingly connected world."

Related Link: A Beat And Raise Quarter For Synopsys

Therefore, analysts see investors interest from different categories be it private equity players or big multinational manufacturing companies in the EDA shares realizing the importance apart from the attractive key metrics like cash flow that this group generates. This kind of interest drives up valuation multiples and narrows the gap with others in the same field.

The brokerage is comfortable with the 7 percent top-line growth in 2016 and 3 percent next year. This would drive the company to deliver EPS of $3.05 and $3.25 respectively. The firm initiated EPS estimate of $3.50 on revenue growth of 5 percent for 2018.

Diffely likes Synopsys, citing its leadership position and exposure to superior growth. Moreover, Synopsys is one of the top three companies that did not grow due to aggressive share buyback program.

At last check, the stock traded at $61.01, gaining $1.75, or 2.95 percent.

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