WHAT’S ELON HIDING?! (From Paradigm Press)

Electronic design automation (EDA) company Synopsys (NASDAQ: SNPS) has recently experienced a resurgence in investor sentiment. Through mid-September, Synopsys shares were down more than 20% year-to-date (YTD). Since hitting its September low, the stock has surged more than 30%, putting shares in the green for the year.

Several key developments have aided the stock’s recovery, including an over $1 billion deal with Amazon (NASDAQ: AMZN) and a development deal with OpenAI. These events signal a potential inflection point in the stock’s trajectory, as Synopsys has so far been a chronic underperformer during the AI investment wave.

Understanding Synopsys’ Underperformance

Synopsys’ poor 2026 performance has been a microcosm of its longer-term underperformance during the AI investment era. From the beginning of 2023 through its September low, Synopsys shares returned just 15%. The stock’s recent surge lifts this figure to approximately 56%, but this is still far from impressive. Over the same period, the S&P 500’s return is approximately 110%, and the S&P 500 tech sector has returned around 225%.

Synopsys’ underperformance has been due to several factors. This includes weakness at Intel’s (NASDAQ: INTC) Foundry business, which has faced delays and has struggled to secure large contracts for its most advanced nodes. This hurts Synopsys’ intellectual property (IP) business because it invested significantly in developing these chips, but it only receives payment once customers commit to Intel’s technology.

There has also been a fear among some investors that AI tools could supplant current EDA tools, hurting demand longer-term. Luckily for Synopsys, the firm’s latest developments push back on these risks.

Synopsys Unlocks New IP Demand With Amazon

Synopsys has signed an over $1 billion deal with Amazon, primarily based around its IP business. The deal includes a $1 billion license fee that allows Amazon to use Synopsys’ IP across multiple generations of its Graviton, Trainium, and Nitro chips. On top of this, Synopsys will receive a customization fee and royalties, which are part of its new application optimized IP (AoIP) business model. Synopsys’ traditional standards-based IP model only includes licensing and nonrecurring engineering fees.

With the AoIP model, Synopsys’ goal is that royalties, where it receives payment for each chip produced, will exceed license fees long-term. This provides much more upside to each AoIP agreement. The Amazon deal also helps mitigate the weakness at Intel’s Foundry because Amazon is already deploying its custom chips at scale, providing more certainty around royalty revenue. However, this applies to future generation chips, meaning royalties will not kick in for over a year from now.

By fiscal year 2030 (FY2030), Synopsys expects to generate $1 billion in AoIP revenue. Importantly, it bases this forecast only on current contracts and commitments, implying room for long-term upside potential. This deal demonstrates the importance of Synopsys’ IP for businesses pursuing long-term custom chip roadmaps. Additionally, the new AoIP model shows the company is exerting pricing power through customization and royalties, a strong positive signal.

OpenAI and Synopsys Partner to Accelerate Chip Development

The company’s deal with OpenAI also has significant implications. Together, the two firms will develop GPT-Synopsys, “a specialized model for chip design that brings together OpenAI's frontier AI with Synopsys' trusted EDA tools and chip design expertise.” Essentially, the companies will train a model that can operate Synopsys’ EDA tools, thereby accelerating the chip development process.

This is important because chip design involves running many experiments and then iterating until engineers find the best design. This creates a bottleneck where humans can only run so many experiments at once. By allowing engineers to autonomously explore a much greater range of designs, OpenAI co-founder Greg Brockman argues that companies can shave weeks or months off the design process.

Synopsys argues that this will expand its total addressable market because AI will use more of its EDA tools. This could also accelerate its IP business, as companies can bring newer chips into production faster. The deal also directly pushes back on the idea that AI models will displace EDA tools, as OpenAI itself clearly sees a need to leverage Synopsys’ expertise.

Synopsys Raises Outlook After Finding New Growth Vectors

Amid these developments, Synopsys significantly raised its long-term guidance. Through FY2030, it now expects revenue to increase by a mid-teens compound annual growth rate, up from "double digits" before. The firm also targets an adjusted operating margin of 50% by FY2030, a significant improvement from its prior mid-40% expectation. This implies a large expansion over the coming years, with Synopsys guiding for a 41.5% adjusted operating margin in fiscal year 2026.

Synopsys’ deal with Amazon and its partnership with OpenAI represent two new ways the firm can benefit from AI development. Looking into 2027, it will be important to monitor whether Synopsys sees an uptick in its EDA growth through the OpenAI deal, and if the company can secure more large AoIP customers outside of Amazon. Should the company continue to gain momentum in these areas, it could provide considerable tailwinds for its financials and share price.

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