HSBC upgraded Synopsys Inc. (NASDAQ:SNPS) to Buy from Hold on September 25 and raised its price target from $490 to $700, implying a multiple of nearly 35 times HSBC’s fiscal 2027 EPS estimates. According to analyst Frank Lee, the company is evolving beyond its traditional slow-growth software profile as its licensing-plus-royalty model and agentic AI tools create a new path to benefit from AI.
Still, the upgrade comes only a month after Synopsys beat earnings and raised its own guidance, suggesting HSBC is paying a higher price for a growth story that the fundamentals have yet to fully validate. In other words, the bank is betting on a shift in how the company generates revenue rather than simply paying more for its current earnings. Synopsys is gaining attention for its AI potential, but other AI stocks could offer even more upside.
What Was Behind The Upgrade?
Analyst Frank Lee sees Synopsys’ transformation taking place on two fronts. The company is moving away from a “build once, sell many” subscription approach and toward deeper chipmaker partnerships that combine design-IP licensing with royalties linked to chip volumes. The approach targets hyperscalers, custom chip vendors, and foundries, while royalties offer higher margins and broaden Synopsys’ addressable market. The second shift is agentic AI, which could take design tools from supporting engineers to having AI agents run entire workflows.
Subscription-plus-consumption pricing could further increase usage beyond human-paced demand. The company’s latest results provide some support, with fiscal third-quarter revenue up 42% to $2.48 billion, including approximately $711 million from Ansys, alongside higher full-year guidance. But is Synopsys actually a better AI investment than its closest rival, Cadence? Check out our head-to-head comparison of SNPS and CDNS to see which stock offers the stronger investment case.
The New Model Has Customers, but Royalties Still Need to Scale
The royalty and agent-based consumption models are still in the early stages. Synopsys announced a multiyear agreement worth more than $1 billion with Amazon on September 30, combining IP licensing with production-linked royalties. Synopsys has said that revenue synergies from Ansys will not begin until fiscal 2027, while its agentic platform is currently measured by customer engagements rather than bookings. HSBC’s $700 target implies a multiple of roughly 35 times HSBC’s fiscal 2027 EPS estimates. That means the target relies on significant multiple expansion in addition to earnings growth, with the target already pricing in a transition that has yet to begin. China export restrictions continue to weigh on design activity; GAAP operating margin is near 10% due to Ansys amortization, and Cadence is pursuing a similar agentic AI strategy.
Synopsys Looks Fairly Priced for the Business It Has Today
Synopsys trades at approximately 61 times the midpoint of management’s fiscal 2027 GAAP EPS guidance. That figure is misleading, though. Costs from the Ansys acquisition are weighing on reported profits, which is why the roughly 28x forward multiple on adjusted earnings gives a fairer picture. Analysts expect steady earnings growth of around 15% to 21% a year through fiscal 2029, which is solid but not exceptional. The company also carries about $7 billion more debt than cash, largely tied to the Ansys deal. To me, the stock looks fairly priced for what Synopsys does today. HSBC’s target depends on Synopsys scaling its royalty and AI businesses fast enough to justify a premium valuation. Read our article: Synopsys (SNPS) Has a Strong Design Business to see if Synopsys’s growth is worth the premium.
Institutional sentiment around Synopsys has improved slightly, with the number of hedge funds holding the stock rising from 84 at the end of Q1 2026 to 85 at the end of Q2 2026. Short interest stood at 2.99% of float as of September 15, 2026.
SNPS also ranks #7 on our list of 10 Best AI Chip Stocks to Buy According to Hedge Funds. See which six stocks rank higher and whether they offer better investment opportunities.
The licensing-plus-royalty model has a credible foundation, while Synopsys’ $10.9 billion backlog provides time to execute on the strategy. Hedge fund ownership has also edged higher, while short interest remains below 3% of the float, suggesting professionals are willing to stay invested. However, the $700 target reflects a business model that management has outlined but has yet to deliver fully. Investors are therefore being asked to price in substantial future royalty growth before production-linked revenue from newer agreements has demonstrated its full earnings potential.
While we acknowledge the risk and potential of SNPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SNPS and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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