Synopsys (NASDAQ: SNPS) experienced a notable decline in after-hours trading on Wednesday, with shares slipping 2.8% to $398.65 from a closing price of $410.00. This drop erased approximately $2.2 billion in market capitalization, a reaction that may seem counterintuitive given the company's better-than-expected quarterly results and an upgraded full-year forecast.
The Sunnyvale, California-based electronic design automation (EDA) leader reported fiscal third-quarter adjusted earnings per share of $3.91, surpassing the consensus estimate of $3.67. Revenue came in at $2.477 billion, also beating expectations of $2.44 billion. On a year-over-year basis, revenue surged 42% from $1.740 billion, while adjusted EPS rose from $3.39.
Despite these robust numbers, investors appeared to focus on the magnitude of the guidance increase. Synopsys lifted its fiscal 2026 revenue outlook to a range of $9.69 billion to $9.74 billion, up from the previous $9.63 billion to $9.71 billion. The midpoint of this revision represents an increase of roughly $45 million, which some market participants viewed as modest relative to the company's valuation. Additionally, the adjusted EPS forecast was raised to $15.04–$15.10, up from $14.72–$14.80, a 2.1% increase at the midpoint.
CFO Shelagh Glaser attributed the strong performance to robust demand in the design landscape, driven by artificial intelligence. She noted that customers are developing increasingly complex chips with tighter timelines, fueling demand for Synopsys' design automation tools. The company's Design Automation segment, which includes the recently acquired Ansys simulation business, reported revenue of $2.003 billion, a 52.7% increase year over year. This segment accounted for 80.9% of total revenue and posted an adjusted operating margin of 45.2%, up 70 basis points.
Design IP revenue also showed resilience, growing 10.8% to $473.8 million, marking a return to year-over-year growth after previous declines. The company's overall non-GAAP operating margin expanded to 41.6%, up from 20.1% in the prior year, highlighting the profitability of its software-centric business model.
Looking ahead, Synopsys guided fourth-quarter revenue in the range of $2.53 billion to $2.58 billion. The company also set a full-year free cash flow target of approximately $2.6 billion and an adjusted operating margin goal of 41.5%.
However, valuation remains a central concern for investors. As of Wednesday's close, Synopsys traded at nearly 95 times trailing earnings, compared to Cadence Design Systems (NASDAQ: CDNS) at about 66.6 times. This premium leaves little room for operational missteps. The after-hours decline, despite the guidance raise, suggests that investors may have been hoping for more substantial upward revisions to justify the high multiple.
The stock ended the regular session up 0.3%, with trading volume 39% above the usual level, indicating heightened investor interest. Analyst consensus shows a mean price target of $571.92 for Synopsys, implying a potential upside of 39.5% from the latest close, while Cadence has a mean target of $411.73, representing a 23.0% upside.
Risks to the forecast include integration expenses related to Ansys, approximately $10.0 billion in debt, export limitations, and reliance on key customers. These factors could counterbalance AI-driven growth. The upcoming test will be fourth-quarter Design IP growth; a sequential increase with stable margins would indicate that the guidance boost is driven by more than just acquired revenue.
