Morgan Stanley has raised its price target on Synopsys to $574, arguing that the chip-design software maker's artificial intelligence story is not yet reflected in its share price. The bank believes that a shift toward consumption-based pricing could expand the electronic design automation (EDA) market beyond what current valuations suggest.
What is Synopsys and why does it matter?
Synopsys is a leading provider of EDA software—the tools that chipmakers use to design, test, and verify increasingly complex semiconductors. As chips become more intricate, with billions of transistors packed into ever-smaller spaces, the software that helps engineers manage that complexity becomes more critical. Synopsys, along with a few rivals, essentially forms the backbone of the global semiconductor design industry.
Morgan Stanley, a global investment bank, argues that the rise of artificial intelligence will boost demand for these tools. AI workloads require specialized chips, often custom-designed for specific tasks like training large language models or running inference in data centers. That trend is expected to drive more design activity, which in turn means more EDA software usage.
The consumption-based pricing angle
The bank's optimism also hinges on a business model shift. Traditionally, EDA software has been sold through time-based licenses—customers pay a fixed fee for a period of access. Synopsys, however, has been moving toward a consumption-based model, where customers pay based on actual usage, similar to how cloud computing services charge per hour or per compute unit.
Morgan Stanley says this model could widen the EDA market beyond what today's valuation implies. If more companies—especially smaller ones or those new to chip design—can access tools without a large upfront commitment, the total addressable market could grow. Consumption pricing might also align Synopsys' revenue more closely with its customers' success, potentially smoothing out some of the cyclicality that has historically characterized the semiconductor industry.
This is not a completely new idea. Other software companies have successfully transitioned to usage-based pricing, and investors often reward such moves because they can lead to more predictable, recurring revenue. But for EDA, the shift is still in its early stages, and Morgan Stanley believes the market has not fully appreciated its potential.
What it means for investors
For everyday investors, the key takeaway is that a major Wall Street bank sees upside in Synopsys that the market hasn't yet priced in. The $574 price target implies a significant gain from current levels, though it's important to remember that price targets are just one analyst's opinion and can be wrong.
More broadly, this view reflects a growing conviction that AI is not just a story for the big tech companies that build and deploy models, but also for the companies that supply the underlying infrastructure. Synopsys sits in that supply chain, and if AI-driven chip demand continues to grow, the company could benefit for years to come.
However, investors should also consider the risks. Synopsys faces competition from other EDA vendors, and its customers—the chipmakers—are themselves subject to cyclical downturns. A slowdown in semiconductor spending could hit Synopsys' revenue, regardless of the AI narrative. Additionally, the transition to consumption-based pricing might initially pressure revenue as customers adjust their buying patterns.
Morgan Stanley's note is one of several recent analyst actions on tech names. For context, Morgan Stanley has also highlighted Azure growth as key to Microsoft's earnings beat, underscoring the firm's focus on AI-driven demand across the tech sector.
Investors watching the broader market might also note that tech valuations have been under pressure recently, as concerns about high prices and rising oil costs weigh on sentiment. In that environment, a bullish call on a specific stock like Synopsys stands out.
Ultimately, the Morgan Stanley note is a signal that at least one major bank sees more value in Synopsys than the market currently does. Whether that view proves correct will depend on how quickly AI-driven chip design accelerates and how successfully Synopsys executes its pricing strategy.
