trading at close to a four-year low, some investors think it may be time to get back in.
On Monday, buyers pushed shares of the chip-design software vendor up 2.6%. "The value investors are beginning to sniff around," said one buy-side analyst.
But cheap as its shares may be, few analysts see a catalyst to make Synopsys a good investment over the next few quarters at least. And on Tuesday, the modest rally started to look like the proverbial dead-cat bounce, as shares shed 12 cents, or 0.8%, to $15.06.
Last week the Mountain View, Calif., company said
second-quarter earnings fell about 15% and delivered equally bleak news for the fourth quarter and next fiscal year. The company's shares plummeted 31%.
The most unsettling news was stated succinctly by Chairman and CEO Aart de Geus in a call with analysts after the announcement: "We will be in the low part of our renewal cycle for the next five quarters with our global and strategic accounts, which make up two-thirds of our business." As a result, he estimated that revenue in fiscal 2005 will be about $940 million; a few quarters earlier preliminary estimates by the company had pegged revenue for the period at about $1.4 billion, said analyst Erach Desai, who follows the company for American Technology Research, which doesn't do investment banking.
Wall Street knew the company might have a tough time convincing customers to upgrade before 2006 because it recently completed a significant product cycle. "However the company has,
until the call provided a much more rosy view, arguing that the technology advancement made across its products in 2004 would entice customers to renew again," Wells Fargo analyst Jennifer Jordan wrote in a note to clients.
Cadence Design Systems
( CDN), meanwhile, is entering the high side of its cycle, and
Magma Design Automation
( LAVA) has significant competitive momentum, Jordan added during an interview. (Wells Fargo does not have a current investment banking relationship with Synopsys or its major rivals.)
To be sure, the electronic design automation sector has been hurting for some time. In the second quarter, for example, revenue for the publicly traded companies in the sector was up just 3.5% year-over-year, according to a report by Henke Associates, a Northern California-based consultancy. And pricing in the industry remains very difficult for vendors.
But eight of the nine companies in the sector managed positive revenue growth, while Synopsys was off 6.2%, according to the report.
The company blamed at least some of the loss of business on its licensing model and said last week it will move 90% of its revenue to a subscription model. Now, about 70% to 75% of revenue is derived from subscriptions, with the balance coming from more traditional licensing contracts, which require a large upfront payment by the customer.
Desai, for one, didn't altogether buy the business model explanation. "They've been tweaking the model for years. At this point, it shouldn't have made such a big difference," he said.
He added, however, that the company could well be at or approaching a bottom, based on valuation, which he put at about 1.8 times estimated 2004 revenue with cash stripped out, and he recently changed his rating from "sell" to "hold." Still, Desai doesn't see an immediate catalyst, and worries that management has lost its credibility by missing forecasts so badly.
"A lot of us are kicking ourselves for missing the story and not getting out sooner," said a fund manager who still holds a significant amount of the stock.
The company's balance sheet and basic business are far too strong to imagine it going away, but it's also hard to imagine someone buying it in the near future. For now, the sidelines could be the best place to be.