Synopsys (SNPS): $26.95:
Synopsys has transitioned to a subscription-based revenue model. With 3-year contracts, SNPS has very strong visibility relative to most technology companies. The company is expanding margins and has new management in place that has something to prove. SNPS increased guidance on 11/29 and Mentor Graphics just raised its guidance earlier this week. Near-term business is healthy.
The stock trades at 20x CY07 and 16x CY08. More importantly, the current price represents ~12x CY07 Free Cash Flow (10x 2008). This is less than the S&P500.
The key catlyst to SNPS is if it can expand its operating margins more rapidly than Wall Street estimates are assuming. Given the recent increase to guidance, I believe this is the case.
Technically, the stock has formed a tight range after generating strong momentum on a recent push up to $27 in December. The stock appears poised to break out of this range to the upside as sellers appear to have been absorbed and the stock could move rapidly to $28-30 area.
$26.95 (01/11/07)
