Application security (AppSec) is coming into focus as a top theme in the cybersecurity space. Recent acquisitions of AppSec start-ups have been made, and cloud software providers are launching new modules to address the growing complexity involved in developing apps. But one little-known leader in this space is actually a semiconductor design software company: Synopsys (SNPS -0.04%).
Here’s why I recently started buying shares of this semiconductor stock.
A myriad of issues for software developers
Perhaps AppSec has shown up on your radar lately. Palo Alto Networks, the largest cybersecurity pure play (by revenue and market cap), recently acquired a start-up called Cider Security to expand on its app and software supply chain security capabilities. Cloud observability software pioneer Dynatrace has also been expanding its reach into AppSec in recent years. Other stocks have solutions too, including Rapid7 and open-source software code repository GitLab.
What’s the big deal with application security? Just like any physical product, software is assembled via the use of smaller and more basic parts. In today’s increasingly cloud-first world, that means those involved with development might be operating remotely from each other. Those parts are thus moved via the web, sometimes assembled in multiple places, and patched together with custom code to finish the final product.
That supply chain of software coding needs to be protected, the integrity of the code and software licenses checked for accuracy, and the software tested for vulnerabilities before being put into use. It can be a complicated web of processes, but it’s an important part of software development — and critical to the future security of an organization’s operations. After all, being proactive is the best way to defend against attacks, and what better time to be proactive than before software actually goes live?
Synopsys is a chip design software and AppSec leader
It may come as a surprise to many semiconductor investors, but Synopsys has actually been named a top leader in application security testing for years. In fact, in Gartner‘s most recent Magic Quadrant for app security testing, Synopsys proved to be the top dog. Synopsys is most well known as an electrical design automation (EDA) software provider, along with other top EDA outfits Cadence Design Systems and Siemens‘ Mentor software.
App security and testing is actually a key differentiating factor for Synopsys versus its EDA peers. And it makes sense. All sorts of chip design companies and computing device engineers use Synopsys. As software is developed, what better time to start working out potential kinks than at the hardware level, which is engineered to optimize an app’s performance? This is a seamless extension of the work hardware companies are doing, and an area I expect to be increasingly important in the coming decade as the cloud, AI, and other high-performance computing further complicates the structure of applications.
As far as financials go, Synopsys also offers consistent revenue and profit growth, owing to the fact that most of its sales are recurring in nature — making this a type of software-as-a-service (SaaS) play on the cyclical semiconductor market.
Data by YCharts.
I see no shortage of growth for Synopsys within the semiconductor industry, as well as cloud and AI markets. Analysts expect each of these areas to grow by double-digit percentages for years to come. Application security is a sweet (and little known) bonus for Synopsys shareholders, since cybersecurity is also a secular growth trend in the larger economy. Synopsys is a large and well-established company already, so I don’t think it will be the highest-growth tech stock around. But trading some of that high-growth potential for reliability is not necessarily a determent.
Plus there’s valuation. Even in a bear market, Synopsys trades for a hefty 53 times trailing-12-month earnings (or 28 times 1-year-forward expected earnings). That’s why I said I “started” a position in Synopsys. This is a prime dollar-cost averaging candidate for me. I’ll buy over time and gradually build up to a larger position, which will allow for catching any dips in share price along the way.
Nevertheless, I think Synopsys is a fantastic businesses that offers incredibly sticky software services for security and computing system design. As such, investors should consider putting Synopsys on their watch lists.
Nicholas Rossolillo and his clients have positions in Cadence Design Systems, Dynatrace, Palo Alto Networks, and Synopsys. The Motley Fool has positions in and recommends Cadence Design Systems, Palo Alto Networks, and Synopsys. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
