Synopsys delivered a solid quarter, with pricing leverage and AI monetization becoming the key debate going forward

Overview

This report is Goldman Sachs's earnings review of Synopsys Inc. The report believes the company's quarterly results were solid overall, with revenue, margins, and EPS coming in above expectations, while FY26 revenue guidance was broadly maintained and margin and EPS guidance were raised. Although the stock may trade range-bound in the short term because results were close to expectations, the report believes forward revenue guidance has been substantially de-risked, and that Ansys integration, pricing optimization, and AI-related demand are the key themes investors will focus on next.

Core views

Goldman Sachs maintains a Buy rating on Synopsys. The core views include: first, the company's FY2Q revenue, operating margin, and non-GAAP EPS all exceeded market expectations; second, Ansys integration is progressing smoothly, expanding the customer base and providing long-term opportunities in simulation and analysis; third, the company has room to improve pricing on strategic assets and better monetize customized critical IP; fourth, AI is expected to boost demand for EDA, IP, and simulation, while driving an evolution from traditional subscriptions to a subscription-plus-agent-consumption model.

Analysis framework

The report uses an earnings-and-guidance comparison framework, comparing Synopsys's actual FY2Q revenue, segment revenue, margins, EPS, and backlog against Goldman Sachs and market expectations, and combining this with changes in FY3Q and FY2026 guidance, progress on Ansys integration, pricing strategy, AI demand evolution, and valuation multiples to assess the investment implications.

Methodology notes

• Valuation methodsTarget Price Multiple Method

  40x P/E multiplied by normalized EPS

  The 12-month target price of $600 is based on an unchanged 40x P/E multiple applied to an estimated normalized EPS of approximately $15.00.

• Factor AnalysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs Factor Profile provides context for investment judgment by comparing a stock's growth, financial returns, valuation multiples, and composite percentiles versus the market and industry peers.

• M&A AnalysisM&A Rank

  Tiered probability of being acquired

  Goldman Sachs uses its M&A framework to assess the probability that covered companies become acquisition targets, using levels 1 to 3 to indicate high, medium, and low probability; this report discloses the framework for explanation, but does not use it as a core basis for the Synopsys investment conclusion.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Synopsys Inc. (SNPS)

  Primary subject of the report; Goldman Sachs maintains a Buy rating

  Strengths

  A key supplier of semiconductor design software; solid FY2Q performance; raised margin and EPS guidance; Ansys integration progressing as planned; upside potential in pricing and AI monetization.

  Weaknesses

  The stock may trade range-bound in the short term; Design IP revenue was below Goldman Sachs expectations; backlog declined quarter over quarter.

  Comparison

  FY2Q revenue, operating margin, and EPS were all above Goldman Sachs and market expectations; FY3Q revenue guidance was below Goldman Sachs but above market expectations.

  Risks

  Export restrictions, market share losses, and a decline in the number of custom chip designs.

• Cadence Design Systems Inc. (CDNS)

  Peer read-through name

  Strengths

  It has recently reported a solid outlook, reducing the incremental impact of Synopsys's results on it.

  Weaknesses

  The report does not analyze its fundamentals in detail.

  Comparison

  The report expects a limited reaction in CDNS to Synopsys's results because CDNS has already reported recently.

  Risks

  Peer valuation and pressure on the software sector may affect market sentiment.

• Ansys

  Simulation and analysis business being acquired and integrated by Synopsys

  Strengths

  Integration is progressing as planned; FY26 revenue expectation is approximately $2.9 billion; around 50% cost synergies are expected to be achieved by the end of FY26.

  Weaknesses

  Delivery of integration synergies still requires continued execution.

  Comparison

  FY2Q Simulation & Analysis revenue of $652mn was above Goldman Sachs expectation of $570mn and market expectation of $616mn.

  Risks

  Integration delays or lower-than-expected synergies could affect margin expansion.

Key data

• FY2Q revenue$2.28bnAbove Goldman Sachs expectation of $2.24bn and market expectation of $2.25bn.
• FY2Q operating margin39.5%Above Goldman Sachs expectation of 38.0% and market expectation of 38.2%.
• FY2Q non-GAAP EPS$3.35Above Goldman Sachs expectation of $3.14 and market expectation of $3.15.
• Ending backlog$11.0bnCompared with $11.3bn in the previous quarter.
• Midpoint of FY3Q revenue guidance$2.44bnBelow Goldman Sachs expectation of $2.48bn, but above market expectation of $2.43bn.
• Midpoint of FY2026 revenue guidance$9.665bnPrevious midpoint was approximately $9.61bn; broadly in line with Goldman Sachs expectation of $9.66bn and market expectation of $9.63bn.
• Midpoint of FY2026 operating margin guidance41.0%Previous midpoint was 40.5%; above Goldman Sachs expectation of 40.1% and market expectation of 40.6%.
• Midpoint of FY2026 EPS guidance$14.76Previous midpoint was $14.42; above Goldman Sachs expectation of $14.50 and market expectation of $14.43.
• 12-month target price$600Based on a 40x P/E multiple and approximately $15.00 of normalized EPS.

Impact & implications

The investment implication of the report is that Synopsys's stock may trade range-bound in the short term because earnings were broadly in line with expectations, but the medium-term fundamentals remain supported by multiple factors: reduced FY26 revenue risk, margin improvement, advancing Ansys synergies, expanded IP and EDA customer base, and new demand plus potential pricing model changes driven by AI workflows. Spillover impact on peer Cadence Design Systems is expected to be limited, because Cadence has already reported earnings recently.

Risks

• Export restrictions could affect the company's sales and customer demand.
• Market share losses could weaken growth in EDA, IP, and simulation businesses.
• A decline in the number of custom chip designs could pressure demand for IP and design tools.
• If Ansys integration falls short of expectations, it could affect synergies, margin expansion, and long-term growth assumptions.
• There is uncertainty around the pace of monetization for AI and new pricing models.

What to watch

• Around the September Investor Day, investor discussion on pricing concessions, monetization of strategic assets, and acceleration of AI revenue.
• Whether FY3Q revenue, operating margin, and EPS reach the midpoint of guidance.
• Whether FY2026 revenue midpoint of approximately $9.665 billion, operating margin of 41.0%, and EPS midpoint of $14.76 can be achieved.
• Progress toward the approximately $2.9 billion FY26 Ansys revenue target and around 50% cost synergies.
• The pace of IP customer migration to the new pricing model, especially the transition of hyperscaler customers around the end of FY26.