Synopsys Earnings: Good Start to 2025, With China Headwinds Still in Sight

We maintain our $550 fair value estimate for wide-moat Synopsys after the firm reported top-line results within our expectations and a solid beat on the bottom line. This quarter we saw China form a lower proportion of revenue (approximately 12% compared with 16% in the previous quarter), as US restrictions on China take effect. Furthermore, China’s domestic economy is facing a weak macroeconomic environment that led to slower sales growth for Synopsys for the region. While we expect US firms to very gradually lose share in China over the long term, China’s macro trend downward has been a bit harsher than we originally anticipated. Management now expects revenue from China to grow more slowly than the corporate average, which is slightly more bearish than the commentary last quarter. Even so, the full-year revenue outlook was maintained as other regions and product strength still supported the initial full-year guide. Shares are trading at a 13% discount to our fair value, which we view as slightly undervalued, but still 3-star-rated on a risk-adjusted basis.