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Synopsys ($SNPS) is being considered by Wall Street analysts as a really coolInternet of Things (IoT) stock. Now IoT is becoming hot investing property. It is an industry that just about depicts what the future holds. All devices including everyday appliances will be connected, enabling them to function smarter, according to the user's expectations. The whole world is set to get interconnected. So it definitely is a happening industry.
Why Synopsys Is Valued Highly
Now why is Synopsys such a great stock? On Wednesday, October 25, 2017, RBC Capital revealed that it has upgraded Synopsys from an already positive buy-rated stocks classification to "Top Pick". RBC has assigned a price target of $100 for Synopsys, predicting that it will provide an 18% profit return to new investors.
So why is Synopsys considered such a cool stock? We've seen how crucial IoT is set to be for our daily lives. Connected appliances and smart homes are the future, but for appliances to be connected and digitally smart they need to be fitted with semiconductor chips. And, while chipmaker stocks will be crucially important here, those chips need to be built by machines. And those machines need software to perform. That's where Synopsys comes in, coding the software for running these chip manufacturing machines. The chips manufactured by these machines make appliances smart and connected. That puts Synopsys right at the top of the Internet of Things, making it very important.
Synopsys Ready for Increasingly Complex Chip Designs
RBC believes that there is increasing complexity in chip designs for semiconductors. Complex chip designs require more sophisticated electronic design automation (EDA) for manufacturing and testing them. Motley Fool analyst Rich Smith points out that Synopsys is part of the Intelligence Advanced Research Projects Activity (IARPA) team of the government. It has also received a contract from IARPA for developing superconducting electronics.
That shows Synopsys has the expertise to fulfill the high expectations of EDA. RBC believes this expertise could be translated to improved profit margins in the coming years since the company is not only open to the IoT industry but also other crucially important industries such as autonomous driving technology and artificial intelligence that require advanced chip designs.
Operating Profitability Increasing for the Company
Smith also points out that though Synopsys has been experiencing declining gross margins generally, it has cut costs from its business. It has therefore been able to increase its operating profitability. The S&P Global Market Intelligence data reveals that Synopsys has managed to expand its operating profit margin from fiscal 2014's 12.1% to 15.6% recently with the growth coming in just the past 12 months. This has caused profits to grow, and the annual net income has increased in the past three years by roughly 27%.
In the past 12 months, Synopsys has managed to generate positive free cash flow of nearly $530 million. This is a massive 60% more than the reported $329 million net income reported by the company. The profit margin could continue to improve and that could keep the cash flow increasing.
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