Is Synopsys (SNPS) Stock Truly Undervalued After a Recent 18% Rally?

The recent 18% price rally in Synopsys (SNPS) has sparked renewed debate about whether the stock is undervalued or if the surge has already priced in its long-term potential. To assess this, we must dissect Synopsys' valuation metrics, growth drivers, and near-term risks against the backdrop of a recovering software sector and evolving semiconductor demand.

Valuation Realism: A Mixed Picture

Synopsys' current valuation metrics suggest a nuanced picture. As of December 2025, the company trades at a P/E ratio of 39.02, below the Software & Services sector average of 42.11. Similarly, its P/S ratio of 14.41 lags the sector's 13.49, hinting at relative undervaluation in these metrics. However, the P/B ratio of 9.82 exceeds the sector's 19.19, suggesting overvaluation here.

Historical volatility further complicates the narrative. Earlier in 2025, Synopsys' P/E ratio peaked at 48.53 before retreating to 30.05 by November, reflecting investor sentiment shifts amid macroeconomic uncertainty. This variability underscores the importance of aligning valuation with forward-looking fundamentals rather than static metrics.

Long-Term Growth: AI, Ansys, and EDA Market Expansion

Synopsys' long-term thesis hinges on its dominance in electronic design automation (EDA) and its aggressive foray into AI-driven tools. The company's $35 billion acquisition of Ansys in 2025 is a transformative move, positioning it as a "silicon-to-systems" provider capable of addressing complex design challenges in AI and high-performance computing. Analysts project EDA tools to generate $4.5 billion in revenue in 2025, with a 15% annual growth rate anticipated through 2026.

AI adoption is a critical tailwind. Synopsys' Synopsys.ai platform is already optimizing chip design workflows, reducing simulation times, and enhancing productivity-a necessity as semiconductor designs grow increasingly complex at advanced nodes like 3 nm. The AI chip market itself is forecasted to balloon from $150 billion in 2025 to $500 billion by 2028, offering Synopsys a vast growth runway.

Near-Term Headwinds: China and Design IP Challenges

Despite these positives, near-term risks loom. Revenue from China declined 18% year-over-year in 2025, a direct consequence of U.S. export controls and waning customer confidence in multi-year commitments. This trend pressures the Design IP segment, which accounts for a quarter of Synopsys' revenue and saw a 7.7% decline in Q3 2025 due to foundry challenges. Management has acknowledged margin pressures in this segment through 2026, driven by R&D investments and short-term revenue headwinds.

To mitigate these challenges, Synopsys has initiated a 10% global workforce reduction and reallocated resources to high-growth areas like chiplet-based solutions and high-speed protocol IP. These strategic shifts aim to preserve long-term competitiveness while navigating short-term turbulence.

Analyst Expectations: A Bullish Outlook

Analyst price targets and earnings guidance suggest confidence in Synopsys' trajectory. The average price target of $561.31 implies a 43% upside from its December 2025 price of $475.47. Notably, Needham raised its target to $580 from $550, citing a positive FY2026 outlook. Synopsys' own guidance for 2026-$14.32–$14.40 in EPS and $9.56 billion–$9.66 billion in revenue-surpasses the $12.09 analyst consensus, signaling strong earnings momentum.

Conclusion: A Realistic Undervaluation?

Synopsys' valuation appears realistic when viewed through the lens of its long-term growth drivers. While the P/B ratio suggests overvaluation, the P/E and P/S metrics, coupled with robust AI adoption and a transformative Ansys acquisition, justify a premium relative to peers. Near-term risks, particularly in China, are manageable and do not overshadow the company's structural advantages in EDA and AI. Analysts' bullish price targets and earnings revisions further reinforce this view.

For investors, the key question is whether the market has priced in Synopsys' full potential. Given its leadership in a high-growth sector, strategic agility, and strong R&D moat, the current valuation may indeed represent an opportunity-provided macroeconomic and geopolitical risks remain contained.