How does a company that spent nearly $5bn on repurchasing stock in the last 5 years manage to increase its share count over the same period?
Ask yourself this: 'is this company being run for the benefit of external shareholders or insiders?'
While shareholders are down 22% this year, I bet the net worth of the management team has increased considerably.
Capital allocation is the most important job of management. If it isn't being done right, you don't want to be invested.
Case study: Twitter went public in 2013 at ~$44/share. It was taken private by Elon Musk in 2022 at ~$44/share. It never paid a dividend. An investor over that decade would have earned nothing and lost money in real terms after accounting for inflation. Meanwhile, Jack Dorsey, its CEO, took his net worth from zero to $4.5bn over the same period.
Funnily enough, Twitter was a great company with the right social media model, in the right place at the right time. But capital allocation was done badly. It didn't work out well for investors.
There are too many US companies run like that. Synopsys looks like it may be one of them.
I don’t agree here, James. While I fully agree with the point you are making about such companies, I don’t think Synopsys is such. You left a lot of important data out while making your point.
Synopsys’ share count is up less than 1% over the last 12 months and at a very similar level compared to exactly one decade ago.
Management has solely used repurchases to offset inflation, and it has a healthy enough balance sheet to do so.
Repurchases aren’t meant to lower the share count. Management isn’t focused on returning cash to shareholders but on reinvesting. It simply tries not to dilute them at the same time, which I am not complaining about.
Meanwhile, reinvestments and acquisitions to strengthen its position, leading to its leading position today, have translated into an 880% return for shareholders over the last decade and a 225% return over the last 5 years, well ahead of the S&P 500.
While Synopsys might have a different capital allocation strategy than you might prefer, there isn’t any real value destruction here, and shareholders have been handsomely rewarded through blinding returns.
So, while I agree that such companies need to be avoided, your point about Synopsys is wrong, in my opinion.
Did management’s net worth increase this year? I hope so for them, but I don’t give a sh*t, to be blunt. Management has delivered for investors over the last 20 years, 10 years, and 5 years. What is there to complain about?
Great write-up, Daan. I've heard this name pup up a few times on the BG^2 Pod and have meant to check it out. Would it be correct to compare the moat of the EDA software to Nvida's CUDA in terms of importance to the industry?
I would call Synopsys' EDA more important. There is no way to design current advanced chips without EDA software, which is offered only by Cadence and Synopsys. That goes for all players in the industry, whether Nvidia, AMD, Broadcom, or Intel. But also the likes of ASML and TSMC are close partners that are reliant on Synopsys.
Its importance can't be understated, and decades of R&D make it impossible to compete, similar to ASML's edge in EUV (except this is a duopoly, not a monopoly).
Hi Daan, I forgot something in my comment. About the Ansys acquisition, this is a very big one for a company like Synopsys. And as you know big acquisitions often are big problems for a lot of companies. That is another point of great attention for me.
It is absolutely massive, haha. Yeah, I don't really like the size of the deal and the premium Synopsys is paying. And, indeed, with such big acquisitions come significant risk. This is certainly very important to monitor closely, no doubt.
On a positive note, I do really like the acquisition and the position of the combined company in the semiconductor design process. This is a big strenthening of capabilities and moat.
But, yeah, you are definitely right; execution risk grows.
Thx again Daan, for your vision on the Ansys acquisition. As you also write, it’s a massive acquisition for Synopsys. Usually I wait until I see that such big acquisitions are going well before I buy. But that is of course different when you’re already a shareholder. Another thing that I always look for is the management of the company and their skin in the game. If possible to share your vision about the management, please do so.
Yes, I also love some insider ownership, but, sadly, with Synopsys, there isn't much. Insider ownership is something like 0.62%, with over 85% of its shares in the hands of institutional investors.
As for management itself, the company was founder-led up until January 2024, when Aart de Geus stepped down to Executive Chair. Luckily, he is still very closely involved.
Also, since January 2024, Sassine Ghazi, who joined Synopsys in 1998, has taken over. He is a real veteran as well and has learned under Aart himself.
In general, while skin in the game lacks here, management has a strong track record and deep history within Synopsys, so I am still quite pleased.
Hi Daan, I wasn't familiar with Synopsys before. It's always a pleasant surprise to get to know such top companies. I did know their biggest competitor, Cadence Design, a little better. I see that you have a lot of knowledge about this specific sector. That is why I would like to ask you some additional questions about your choice for Synopsys. If I look at the figures, both Cadence's ROE and ROIC are a lot higher. Actually, at first glance, most of the figures seem to be slightly better at Cadence. I also don't like the rather high SBC at Synopsys. But maybe I'm overlooking things? I would therefore like to hear your opinion.
That is a great question, Guido. This is a perfect example of how financial metrics can be deceiving, even when the businesses operate in a very similar industry.
As far as I can tell, there are a few factors at play.
- First of all, Cadence, thanks to its bigger focus on just EDA, is much more asset-light than Synopsys. Whereas Cadence almost solely focuses on EDA software, Synopsys also has a big IP segment, which is much more capital and R&D intensive (reflected in very high R&D costs). This means Cadence has a higher asset turnover and lower capital requirements, leading to a better ROIC.
- In addition, Cadence has historically been much more focused on buying back shares, enhancing ROE artificially. Meanwhile, Synopsys has barely bought back shares and is much more focused on leveraging its capital inflow to pursue acquisition, which impacts its financial metrics but fuels long-term market share gains, which is exactly why Synopsys is gaining more market share and is expected to outgrow Cadence, despite its larger size.
Ultimately, these factors impact their financial metrics. However, I think both are excellent businesses, with great growth potential. It is just for me, personally, in this industry, I prefer Synopsys' approach, with a bigger focus on long-term success and more diversification.
I hope that answers your question. I am happy to discuss this further.
Thx Daan, your reply clarifies already a lot to me. Both of the companies look interesting to me. As you say, the IP segment might be an advantage for Synopsys in the long run. If possible I would like to hear your vision on the high SBC level at Synopsys.
Oh yes, sorry! I forgot to address that. Yes, SBC is high at about 20% in fiscal 2024, I believe. Honestly, that is too high for my taste, usually. What makes it acceptable to me right now is that the share count at least has been flat since 2013, so investors aren't actually getting diluted that much, as management is active in offsetting this.
Nevertheless, SBC also isn't trending down either, so I am still not too pleased. Management really has to address this.
It is a fair concern, though, personally, I am willing to swallow it for now.
How does a company that spent nearly $5bn on repurchasing stock in the last 5 years manage to increase its share count over the same period?
Ask yourself this: 'is this company being run for the benefit of external shareholders or insiders?'
While shareholders are down 22% this year, I bet the net worth of the management team has increased considerably.
Capital allocation is the most important job of management. If it isn't being done right, you don't want to be invested.
Case study: Twitter went public in 2013 at ~$44/share. It was taken private by Elon Musk in 2022 at ~$44/share. It never paid a dividend. An investor over that decade would have earned nothing and lost money in real terms after accounting for inflation. Meanwhile, Jack Dorsey, its CEO, took his net worth from zero to $4.5bn over the same period.
Funnily enough, Twitter was a great company with the right social media model, in the right place at the right time. But capital allocation was done badly. It didn't work out well for investors.
There are too many US companies run like that. Synopsys looks like it may be one of them.
I don’t agree here, James. While I fully agree with the point you are making about such companies, I don’t think Synopsys is such. You left a lot of important data out while making your point.
Synopsys’ share count is up less than 1% over the last 12 months and at a very similar level compared to exactly one decade ago.
Management has solely used repurchases to offset inflation, and it has a healthy enough balance sheet to do so.
Repurchases aren’t meant to lower the share count. Management isn’t focused on returning cash to shareholders but on reinvesting. It simply tries not to dilute them at the same time, which I am not complaining about.
Meanwhile, reinvestments and acquisitions to strengthen its position, leading to its leading position today, have translated into an 880% return for shareholders over the last decade and a 225% return over the last 5 years, well ahead of the S&P 500.
While Synopsys might have a different capital allocation strategy than you might prefer, there isn’t any real value destruction here, and shareholders have been handsomely rewarded through blinding returns.
So, while I agree that such companies need to be avoided, your point about Synopsys is wrong, in my opinion.
Did management’s net worth increase this year? I hope so for them, but I don’t give a sh*t, to be blunt. Management has delivered for investors over the last 20 years, 10 years, and 5 years. What is there to complain about?
Though I happy to talk further about this, James!
Great write-up, Daan. I've heard this name pup up a few times on the BG^2 Pod and have meant to check it out. Would it be correct to compare the moat of the EDA software to Nvida's CUDA in terms of importance to the industry?
I would call Synopsys' EDA more important. There is no way to design current advanced chips without EDA software, which is offered only by Cadence and Synopsys. That goes for all players in the industry, whether Nvidia, AMD, Broadcom, or Intel. But also the likes of ASML and TSMC are close partners that are reliant on Synopsys.
Its importance can't be understated, and decades of R&D make it impossible to compete, similar to ASML's edge in EUV (except this is a duopoly, not a monopoly).
Great in-depth analysis!
Thank you!
Nice analysis here! Interesting to learn about Jensen’s views
Thanks! Any comment from Jensen always carries a load
Hi Daan, I forgot something in my comment. About the Ansys acquisition, this is a very big one for a company like Synopsys. And as you know big acquisitions often are big problems for a lot of companies. That is another point of great attention for me.
It is absolutely massive, haha. Yeah, I don't really like the size of the deal and the premium Synopsys is paying. And, indeed, with such big acquisitions come significant risk. This is certainly very important to monitor closely, no doubt.
On a positive note, I do really like the acquisition and the position of the combined company in the semiconductor design process. This is a big strenthening of capabilities and moat.
But, yeah, you are definitely right; execution risk grows.
Thx again Daan, for your vision on the Ansys acquisition. As you also write, it’s a massive acquisition for Synopsys. Usually I wait until I see that such big acquisitions are going well before I buy. But that is of course different when you’re already a shareholder. Another thing that I always look for is the management of the company and their skin in the game. If possible to share your vision about the management, please do so.
Yes, I also love some insider ownership, but, sadly, with Synopsys, there isn't much. Insider ownership is something like 0.62%, with over 85% of its shares in the hands of institutional investors.
As for management itself, the company was founder-led up until January 2024, when Aart de Geus stepped down to Executive Chair. Luckily, he is still very closely involved.
Also, since January 2024, Sassine Ghazi, who joined Synopsys in 1998, has taken over. He is a real veteran as well and has learned under Aart himself.
In general, while skin in the game lacks here, management has a strong track record and deep history within Synopsys, so I am still quite pleased.
Hi Daan, I wasn't familiar with Synopsys before. It's always a pleasant surprise to get to know such top companies. I did know their biggest competitor, Cadence Design, a little better. I see that you have a lot of knowledge about this specific sector. That is why I would like to ask you some additional questions about your choice for Synopsys. If I look at the figures, both Cadence's ROE and ROIC are a lot higher. Actually, at first glance, most of the figures seem to be slightly better at Cadence. I also don't like the rather high SBC at Synopsys. But maybe I'm overlooking things? I would therefore like to hear your opinion.
That is a great question, Guido. This is a perfect example of how financial metrics can be deceiving, even when the businesses operate in a very similar industry.
As far as I can tell, there are a few factors at play.
- First of all, Cadence, thanks to its bigger focus on just EDA, is much more asset-light than Synopsys. Whereas Cadence almost solely focuses on EDA software, Synopsys also has a big IP segment, which is much more capital and R&D intensive (reflected in very high R&D costs). This means Cadence has a higher asset turnover and lower capital requirements, leading to a better ROIC.
- In addition, Cadence has historically been much more focused on buying back shares, enhancing ROE artificially. Meanwhile, Synopsys has barely bought back shares and is much more focused on leveraging its capital inflow to pursue acquisition, which impacts its financial metrics but fuels long-term market share gains, which is exactly why Synopsys is gaining more market share and is expected to outgrow Cadence, despite its larger size.
Ultimately, these factors impact their financial metrics. However, I think both are excellent businesses, with great growth potential. It is just for me, personally, in this industry, I prefer Synopsys' approach, with a bigger focus on long-term success and more diversification.
I hope that answers your question. I am happy to discuss this further.
Thx Daan, your reply clarifies already a lot to me. Both of the companies look interesting to me. As you say, the IP segment might be an advantage for Synopsys in the long run. If possible I would like to hear your vision on the high SBC level at Synopsys.
Oh yes, sorry! I forgot to address that. Yes, SBC is high at about 20% in fiscal 2024, I believe. Honestly, that is too high for my taste, usually. What makes it acceptable to me right now is that the share count at least has been flat since 2013, so investors aren't actually getting diluted that much, as management is active in offsetting this.
Nevertheless, SBC also isn't trending down either, so I am still not too pleased. Management really has to address this.
It is a fair concern, though, personally, I am willing to swallow it for now.
Is that 20% of FCF?
I wish. This is 20% of revenue, up from 16% in fiscal 2023.