Why Synopsys Sank

First, let me follow-up on yesterday’s piece related to Oracle’s eye-popping quarter and what it may have implied for the broader ecosystem. Later yesterday, WSJ reported that it was OpenAI who signed a contract with Oracle to buy $300 Billion of compute in the next five years! It is surprising to me that Oracle didn’t bother to mention such a material information during the earnings call. My skepticism certainly notched up a bit after realizing almost the entire increase in RPO was primarily attributed to OpenAI whose ability to pay Oracle is pretty much hinged on its ability to raise money from VCs/public market. As a result, there is a counterparty risk to this contract. Of course, OpenAI is not obligated to buy if they don’t need the compute for some reason, but a bet on Oracle at this point has become somewhat a bet on OpenAI’s continued ability to scale and ability to raise money. As I have mentioned earlier, sentiment in capital market is not really forecastable. AI can be the most consequential technology in the history of mankind and yet, capital market can shut off for a couple of years for some unexpected reasons in the meantime (See Amazon post-tech bubble).

Admittedly, I am surprised that Oracle stock maintained much of its gain after it became clear that OpenAI was almost solely responsible for the RPO growth. To be clear, we already knew OpenAI was the primary customer here, but the amount still surprised me. One reader pointed out to me that if you assume non-cloud software margins of 90% and 70% gross margin for SaaS within cloud revenue for Oracle, the implied incremental gross margin for IaaS in FY’1Q26 was only 25%. That perhaps explains that even though Oracle didn’t shy away from mentioning eye-popping revenue numbers in out years, they were much more reticent to talk about margins or earnings power. Oracle has an analyst day coming up next month; I hope they share more details about their earnings power from these partnership(s).

In April 2025, I published a Deep Dive on Synopsys. Later, Scuttleblurb and I did a podcast together on Cadence and Synopsys (Spotify, Apple, YouTube, RSS Feed). We both inferred that the stock appears to be richly valued when it was around $450. Naturally, the stock went up by ~45% in the next three months. However, on the same day Oracle was experiencing 40% pop on eye-popping RPO numbers, Synopsys went down by 35% after their 3Q’25 call. I will explain why the stock experienced such a precipitous fall behind the paywall.

In addition to "Daily Dose" (yes, DAILY) like this, MBI Deep Dives publishes one Deep Dive on a publicly listed company every month. You can find all the 62 Deep Dives here.