We'll review the earnings set-up on an under-the-radar technology company that's been a top performer. Synopsys (SNPS) is a leading American electronic design automation (EDA) company. Founded in 1986 and headquartered in Mountain View, California, Synopsys provides software, intellectual property (IP), and services for designing and verifying integrated circuits (ICs), also known as chips, and testing and improving software performance and security.
Synopsys provides tools that assist semiconductor companies in designing and verifying the functionality of complex chips. The company has highlighted customers such as Intel, AMD, NVIDIA, Qualcomm, and Broadcom in its presentations. These companies use Synopsys' EDA tools and IP to create their products.
Other customers include companies developing systems or products with embedded chips, such as Apple, Samsung, and Huawei, which rely on Synopsys for tools and IP. The increasing complexity of electronics in cars and planes has made Synopsys' tools critical for designing the chips that control everything from infotainment systems to autonomous driving features. The increasing use of electronics in vehicles, particularly for advanced driver-assistance systems (ADAS) and autonomous driving, drives demand for Synopsys' tools.
Similarly, AI accelerators and other specialized chips for AI workloads are also key growth areas. SNPS 5Y mountain Synopsys, SNPS - 5 years It should come as no surprise that the correlation between Synopsys and the semiconductor index is quite strong, an r-square of ~ 0.62 over the last three years, to put a number on it.
Unsurprisingly, the street is quite positive on Synopsys. Of the fifteen analysts whose recommendations I can see, eleven have buy recommendations, four holds, and no sells. Since fiscal 2019 ended 10/31/19, revenues have grown 87% and earnings by about 144%.
The only fly in the ointment is that the stock has risen 290%. So, while the company has grown, the multiple has expanded considerably. The recent volatility we've seen illustrates that even companies whose underlying fundamentals remain intact can see significant drawdowns when investors are no longer to buy growth at any price.
The trade Therefore, I have two earnings suggestions — one for those who already own the stock and one for those who don't. Synopsys reports earnings after the bell Aug. 21.
For those who already own the shares, consider using a put spread collar as a hedge. The objective is to buy some downside protection offset as much as possible by the sale of an upside call. This provides continued upside participation up to the strike of the call that is sold while mitigating downside risk between the put spread strikes.
Sell Sep. 20 $450 put Buy Sep. 20 $500 put Sell Sep.
20 $600 call As illustrated above, those who do not already own the shares could buy the stock and hedge it with the put spread collar. This would be reasonable for anyone purchasing the stock with a long-term horizon. Consider a call diagonal for those looking to join the bullish crowd with a shorter horizon, buying a longer-dated call, and selling a nearer-dated one against it at a higher strike to offset the decay.
Buy Jan. 17 $550 call Sell Sep. 20 $580 call You will observe that the total amount of premium spent on the call diagonal of ~$34/contract ($3,400 in total premium as each contract represents 100 shares) is considerable, but about 6.
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