Synopsys (SNPS)

By both methods, the value today (DCF $280 · Multiples $315) is below the market price ($503).

Today — expensive, no margin of safety: at $503 trades ~59.7% above its value discounted to today (~$315); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$195.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($503) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (22.2%/year) above our base case (9.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$4.9 bn of owner earnings in year 5 (vs ~$2.8 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on FCF maintenance. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM ended July 31, 2026, built from levels in the third-quarter fiscal 2026 release (8-K of August 26, 2026): revenue of $9,416 million, GAAP operating income of $802 million (8.52% margin) and operating cash flow of $2,938 million. The GAAP margin remains depressed against the 13.0% to 22.1% of the three prior fiscal years, and the cause is identified and transitory: restructuring charges from the plan running through the close of fiscal 2027 and the jump in amortization of intangibles acquired in the Ansys merger, closed July 17, 2025, which took trailing-year depreciation and amortization to $1,811 million against $660 million in fiscal 2025. The valuation metric is the maintenance flow net of stock-based compensation —the expense equals 10.1% of trailing-year revenue— so the model's cash margin already subtracts that compensation before applying capex: on that basis year 0 works out to 21.12%, against a gross margin of 31.20%. Year 1 anchors to the raised guidance from the same release, not to the reported year-over-year rate, which remains inflated by Ansys's partial contribution in the comparison base: revenue of $9,690 to $9,740 million for fiscal 2026 (midpoint of $9,715 million), non-GAAP earnings per share of $15.04 to $15.10, GAAP operating margin of 10.4%, non-GAAP of 41.5%, operating cash flow of $2,800 million, free cash flow of $2,600 million and capex of $225 million. That guided operating cash flow of $2,800 million for the full fiscal year sits below the $2,938 million of the trailing year, revealing a seasonally weak fourth quarter: that is why the model's cash margin path declines from 21.12% in year 0 to 19.90% in year 1 before recovering, instead of extrapolating the trailing-year level. The terminal is set at 22.50% net of stock-based compensation —equivalent to roughly 31% gross— and that calibration is deliberate: the prior pass ended at 24% net, or roughly 34% gross, well above the 28.8% the company itself guides for the current fiscal year. The terminal level remains above guidance because the guided fiscal year still carries integration costs, but it stops being an expansion the filing does not support. The tax rate is 18.0%, the non-GAAP effective rate the company itself publishes in its reconciliation, not the year's GAAP rate, which is an artifact of the compressed pre-tax result. The base-case exit multiple (24 times) sits at the center of the enterprise software band (20 to 30 times), recognizing a wide, stable moat —high switching costs in the chip design flow— offset by execution risk from the Ansys integration. The quarter's news on that front is favorable: the Design IP segment returned to year-over-year growth (10.8%, to $473.8 million) after several quarters of contraction on export controls to China. The company resumed buybacks ($300 million in the trailing year) while continuing to deleverage: debt fell from $13,485 million at the close of fiscal 2025 to $10,037 million.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $392 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $503, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $392 in 5 years and a required return of 4.5% annually, the maximum to pay today is $315. Against the current market price ($503), the margin of safety is -59.7% (trades above the maximum → a premium is paid) and the total return at that price would be -4.8% annually.

• Multiple on depressed GAAP earnings. The multiple on TTM maintenance FCF looks elevated because the denominator is temporarily compressed by integration costs, not because the market is paying an irrational price.
• Forward multiple compression. The entry multiple compresses markedly between today and year 5 as the operating margin normalizes, per the company's own guidance.
• Exit multiple within the archetype's band. 24x maintenance FCF at the center of the enterprise software band [20x,30x].
• No comparison with peers on raw ROIC. Current ROIC is not comparable with mature peers due to the accounting distortion from the recent merger; the multiple is anchored to the archetype, not to the current year's ROIC.
• Leveraged balance sheet after the merger. The substantial debt reduces the margin for error against a prolonged adverse scenario.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (357%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Strong operating cash flow, though inflated by the growth in deferred revenue after the Ansys merger; the valuation metric nets it of stock-based compensation.
• Return on capital. ROIC comes in below the 10% bar this cycle due to the accounting effect of the Ansys merger (doubled invested capital and temporarily compressed earnings), not a weak underlying economics.
• Reinvestment runway. A semiconductor design market in structural expansion from artificial intelligence demand, with room to reinvest at attractive returns once integration normalizes.
• Earnings quality. GAAP earnings are distorted by non-recurring items quantified and disclosed by the company itself (restructuring, amortization of acquired intangibles).
• Stock-based compensation. 11.4% of revenue and 37.4% of free cash flow in the TTM; the valuation metric expenses it in full.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Synopsys does not disclose unit-, customer-, or conversion-rate-level operating metrics: disclosure centers on the revenue category mix (time-based, upfront, maintenance and services) and on performance by segment and geography. The drivers above use reported levels of segment revenue, stock-based compensation and total debt. The last is especially relevant because it jumped from zero to more than $13,000 million with the Ansys merger and has already fallen to $10,037 million, direct evidence of the deleveraging priority the company stated; the buyback, suspended during the first year after the merger, resumed at $300 million in the trailing year.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Design Automation growth. 62.4% year over year in the latest reported quarter, driven by the Ansys contribution and organic growth in the EDA business.
• Design IP contraction. Fell 5.8% year over year on export controls to China and lower demand from a major foundry customer.
• Guidance raised twice. The company raised its non-GAAP revenue and earnings-per-share guidance for fiscal year 2026 in its most recent release.
• Contracted backlog. The release explicitly mentions contracted performance obligations not yet recognized (backlog), though it does not disclose the exact level in the sections reviewed.
• Geopolitical exposure. The decline in China revenue (22% year over year, excluding Ansys) is a structural drag on consolidated growth.

• Recurrence and predictability. Time-based and maintenance revenue with high renewal rates, though the deferred mix (perpetual licenses, hardware) introduces some quarterly irregularity.
• Product differentiation. Mission-critical software with no direct substitute for much of the chip design flow.
• Pricing power. A track record of margin expansion via mix and added value, though explicit price increases are not disclosed.
• Operating leverage. The non-GAAP margin expands with scale, but the GAAP margin for the current year is depressed by Ansys integration costs.
• Recession behavior. Semiconductor R&D spending tends to be less cyclical than manufacturing capex, though not insulated from the cycle.
• Customer concentration. The company's own annual report notes dependence on a relatively small number of large customers in some segments.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.5x
• ✕Interest coverage (EBIT / interest)1.1x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 357% of ROIC
• ✕Value creation (ROIC − 10% bar)-8pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.1x — no over-investment
• ✓Float / working capitalFrees up cash $0.1 bn (float / negative WC)
• ✕Dilution (SBC % of revenue + shares)SBC 10.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Liquidity. Cash and short-term investments of US$3,608 million as of July 2026, with robust operating cash generation.
• Leverage. Total debt of US$10,037 million as of July 2026, down from US$13,485 million in October 2025 after the Ansys merger closed.
• Debt covenant coverage. The debt includes covenants that limit the ability to repurchase shares or pay dividends until leverage is reduced, as the company itself discloses.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Leadership continuity. Sassine Ghazi became CEO in January 2024 after nearly 26 years at the company in operating and sales roles; co-founder Aart de Geus remains Executive Chairman of the Board.
• Capital allocation. Suspended the buyback program to prioritize deleveraging after the Ansys merger, a disciplined decision given the elevated leverage.
• Integrity and communication. Explicitly acknowledges Design IP's weak performance and the ongoing resource reallocation in its own filings, rather than downplaying it.
• Shareholder alignment. No material founding or insider ownership stake was identified within the reviewed proxy window; ownership is mostly dispersed among institutions.

• Restructuring and integration charges that depress GAAP results without touching value: trailing-year operating margin is 8.5% against 13.0% to 22.1% in the three prior fiscal years, on the restructuring plan running through the close of fiscal 2027 and the amortization of Ansys intangibles.
• Recovery punished in excess: the Design IP segment had been contracting on export controls to China and has just returned to growth of 10.8% year-over-year, a turn the price may not yet reflect.
• Merger leverage (debt that jumped from practically zero to $13,485 million) keeps part of the market away while it deleverages, though it has already fallen to $10,037 million and the buyback has resumed.

The market price coexists with a GAAP result depressed by charges the company itself states are transitory, and with non-GAAP earnings that already show margin expansion and drove consecutive raises to full-year guidance. No margin of safety: the price already discounts a demanding scenario. The counterpart this valuation does charge for is that non-GAAP earnings also exclude stock-based compensation, which here is expensed in full: the metric is the maintenance flow net of that expense, not the company's adjusted earnings.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -15%/year (-56% total): the margin of safety protects the downside. The bull (+2%/year, +13% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Substantial debt after the Ansys merger. Elevated total debt with covenants that limit capital flexibility until leverage is reduced.
• Shareholder litigation over Design IP. Two class actions allege false statements or material omissions about the segment's performance, with no estimated accrued loss yet.
• Design IP underperformance. The company itself acknowledges it is reallocating resources from the segment toward higher-growth opportunities, with no guarantee of success.
• China-United States regulatory and geopolitical risk. Growing export controls and Chinese policies fostering local EDA providers threaten its competitive position in that market.
• Ansys integration risk. The expected benefits of the merger rest on projections that may not materialize, with risk to key personnel retention and pressure on margins.
• Large customer concentration. Dependence on a relatively small number of large customers in some business lines.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 2% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 9% at a multiple/growth of 6.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 1% (EBIT/EV) + ROIC 2% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 22% vs our 9%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -15%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 22% growth, far above our 9% — heroic assumptions.