Piper Sandler analyst Clarke Jeffries initiated coverage on Synopsys Inc (NASDAQ:SNPS) with an Overweight rating and a price target of $665.

The analyst noted that from solid hyperscaler and data center activity, Synopsys has seen a substantial improvement in metrics over the past four years, growing at 15% CAGR and expanding operating margins by 1000bps since 2019.

Two transformative transactions could line up Synopsys for further margin expansion, including the acquisition of margin accretive ANSYS, Inc (NASDAQ:ANSS) with hundreds of millions in potential synergies in the years following the close and the sale of the Software Integrity Group (SIG), as over 90% of the margin expansion in the last three years has come from the Semiconductor & System Design group, not SIG, as per Jeffries.

While the integration of Ansys & the horizon for potential synergies create higher execution risk, he noted the sale of SIG will be a positive catalyst that reorients the conversation on core margin expansion soon.

More so than its competition, Synopsys has substantially invested in building a diverse product portfolio of semiconductor and system design tools, including becoming the largest provider of non-processor semiconductor IP (25% of revenue), which are design tools for reusable building blocks in chip design like memory, storage, I/O interfaces, Jeffries said.

With chips and systems seeing disaggregation with multi-die and multi-chiplet, Synopsys should be well positioned to address a longer tail of future designs as the proliferation of electronics in products continues, the analyst said.

While diversification into SIG, systems design & design IP helped Synopsys grow double digits over the last decade, 12% CAGR, margin expansion from 2013 to 2019 was minimal (+100bps) even as revenue rose from $2 billion to $3.3 billion over the same period, he flagged.

However, in recent years, the story has changed. Jeffries said that Synopsys has seen a substantial acceleration in growth and operating margin expansion since 2019, with a 15% revenue CAGR and 1000bps of operating margin expansion.

This helped propel SNPS to being one of the best-performing software stocks over the last five years, with ~400% return vs. ~80% average return across Cloud stocks.

Jeffries projected second-quarter revenue and EPS of $1.44 billion and $2.93.

Synopsys stock gained 53% in the last 12 months. Investors can gain exposure to the stock via ProShares Nasdaq-100 Dorsey Wright Momentum ETF (NASDAQ:QQQA) and Themes Cloud Computing ETF (NASDAQ:CLOD).

Last week, Needham reiterated a buy rating on Synopsys with a $660 price target. Check out more bullish ratings by various analysts on SNPS.

Price Action: SNPS shares are trading higher by 1.91% to $589.91 on the last check Thursday.

Also Read: Synopsys Hits Record Backlog In Q4, Analysts Elevate Price Targets Citing Fundamental Strength

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