For much of the past year, Synopsys (NASDAQ:SNPS) was a stock investors argued about more than celebrated. It had piled on debt to buy simulation specialist Ansys, and its design IP business spent the early part of fiscal 2026 barely growing. Then came Investor Day late last month, new targets running out to fiscal 2030, and a sharp rally the following session.
Synopsys sells the software engineers use to design and verify chips, along with prebuilt circuit blocks (design IP) that chipmakers license instead of building from scratch. Ansys adds simulation software, and most revenue arrives through multi-year licenses. As chip complexity surges to power modern machine learning workloads, the company has earned a spot among the 10 Best AI Stocks to Buy in October. Whether the stock still has room to run depends less on the headline growth rate than on which version of Synopsys’ earnings you decide to believe.
A Toll Booth on Chip Design
Engineers spend years learning these tools, and once a chip program’s design flow is built around them, switching midstream is costly and risky. That stickiness shows up in how Synopsys gets paid. Time-based product revenue reached $1.003 billion in fiscal Q3 2026, up from $892.4 million a year earlier.
It shows up in margins, too. Design Automation, which produced 80.9% of revenue in the quarter, earned an adjusted operating margin of 45.2%, up from 44.5% a year earlier. Synopsys splits much of this market with rival Cadence Design Systems, which leaves chipmakers few practical alternatives.
The IP Business Wakes Up
Fiscal Q3 revenue came in at $2.477 billion, compared with $1.740 billion a year earlier. That comparison is flattered by a full quarter of Ansys against a partial one. The cleaner signal sits in Design IP, which returned to year-over-year growth with $473.8 million in revenue versus $427.6 million, after a sluggish start to the year. Synopsys then raised its full-year targets to $9.715 billion in revenue and $15.07 of non-GAAP EPS at the midpoint.
Investor Day pushed the story further. Management guided fiscal 2027 revenue to $11.1 billion to $11.2 billion, roughly 15% growth, with non-GAAP EPS of $19.04 to $19.12. It also unveiled a multi-year IP agreement with Amazon for custom silicon and a partnership with OpenAI to build GPT-Synopsys, a model trained for chip design. The Amazon deal is an early proof point for what Synopsys calls application-optimized IP, custom building blocks for in-house processors, the same shift lifting custom AI chip designers. The long-range plan calls for roughly 15% annual revenue growth and a non-GAAP operating margin near 50% by fiscal 2030. On this evidence, the moat looks like it’s widening rather than merely holding.
Too Reliant on a Few Giants?
The objection worth taking seriously is concentration. Bigger custom-silicon deals tie more revenue to a handful of hyperscalers, and Synopsys itself lists dependence on a relatively small number of large customers among its risks. Those same customers also have the engineering muscle to pull more design work in-house over time.
That risk doesn’t cancel the evidence. Management says AI-driven chip complexity is lifting demand for its tools, and the broad Design Automation business, not one marquee contract, carried the latest quarter. Still, even with these secular tailwinds driving core growth, Synopsys did not end up in the 10 Best Undervalued Stocks to Buy in October. Customer concentration remains the primary long-term risk to keep watching.
Two Sets of Earnings
At 33.69 times forward earnings, as of October 12, Synopsys trades at a steep premium to the sector’s 23.29. Yet that’s below the stock’s own 5-year average of 37.09, for a company whose EPS is expected to grow 22.75% in 2027. Put simply, investors are paying less than usual for earnings that are still growing quickly.
The catch is accounting. Fiscal 2027 non-GAAP EPS guidance sits at $19.04 to $19.12, but GAAP EPS is guided to just $8.16 to $8.61. Amortization of intangibles acquired with Ansys accounts for $8.06 to $8.12 per share of that gap, a non-cash charge tied to a one-time purchase. Stock-based compensation adds another $5.03 to $5.13, and that one is a real cost to shareholders.
Synopsys expects about $3.1 billion of free cash flow in fiscal 2027, up from roughly $2.6 billion targeted this year, and plans to return up to 50% of free cash flow through buybacks, starting with a $1 billion accelerated repurchase. That cash engine puts it among AI software stocks with real profits.
Hedge fund interest edged up, with 85 funds holding the stock in the most recent quarter versus 84 in the prior one. Short interest stands at 2.99% of the float, a sign of relatively limited bearish positioning.
A Discount With Conditions
The evidence suggests the stock hasn’t fully priced in the Investor Day roadmap, provided non-GAAP earnings are the right yardstick and the 22.75% growth expectation holds. For long-term investors willing to pay a sector premium for sticky, high-margin software, the setup looks reasonable. A stall in Design IP after its rebound, or signs that big customers are taking design work in-house, would change that picture quickly.
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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