Why Shares in Synopsys Tumbled This Week

Key Points

• The dip in the share price could provide an ideal entry point into an exciting long-term growth story.

• The issues are unlikely to be resolved in short order, and management is exploring strategic options.

• 10 stocks we like better than Synopsys ›

Shares in Synopsys (NASDAQ: SNPS) declined by almost 27% in the week through Friday morning. The move comes after the company's disappointing third-quarter earnings report revealed some significant near-term issues that the company needs to overcome.

Why Synopsys' stock crashed this week

The bad news centers on the company's smaller design intellectual property (IP) segment, which provides the building blocks for chip design.

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Synopsys' primary business is electronic design automation (EDA), which encompasses software solutions that help customers design and test chips. The company recently made a transformative deal to buy engineering simulation and analysis company Ansys, with which it can add the capability to test the results of what's designed through its EDA solutions, the so-called "silicon-to-systems" approach. That business (which now includes Ansys) is doing fine, with 23.5% year-over-year growth in the third quarter.

The problem lies in the design IP segment (sales down almost 8% year over year in the quarter), which contributes about a quarter of its sales. CEO Sassine Ghazi discussed three issues on the earnings call.

First, the export restrictions (now lifted) on specific technology to China caused uncertainty, and customers continue to assess making long-term commitments to buying Synopsys solutions. Second, a major foundry customer is facing end-market challenges. Third, Synopsys needs to adjust its resource allocation to better capitalize on higher-growth markets.

Image source: Getty Images.

Where next for Synopsys?

The "silicon-to-systems" approach makes sense in a world where artificial intelligence (AI) and chips are being integrated into an ever-increasing number of products, and Synopsys' long-term growth prospects are excellent. However, overcoming the issues in the design IP segment could take time and is unlikely to be fully resolved in a quarter or two.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Synopsys. The Motley Fool has a disclosure policy.