These software companies are unsung winners in the semiconductor industry

Mention semiconductor and chip giants like Intel Corp., Advanced Micro Devices Inc., and NVIDIA Corp., but there are other, lesser-known companies operating in this space that deserve attention.

The pandemic has kept semiconductors firmly in the spotlight as a variety of industries, from consumer technology to automotive, grapple with chip shortages. software company Synopsys Inc. SNPS,
and Cadence Design Systems Inc. CDNS,
may not be household names, but tacitly play an extremely important role in the broader semiconductor industry.

Synopsys and Cadence build Electronic Design Automation, or EDA, software, a critical tool for chip design engineers. In a recent note, JP Morgan analyst Harlan Sur described chip design software as a critical but often overlooked part of the semiconductor value chain. Companies like Synopsys and Cadence own more than 70% of the chip design software market, he explained, noting that chip design is tied to semiconductor research and development budgets that are not slashed during downturns.

“These companies have a history of increasing revenue even during periods of semi-cyclical downturns,” Sur wrote.

Sur noted that for the past 11 years, spanning three semiconductor down cycles and three years of semiconductor revenue declines, EDA revenue, and therefore Synopsys and Cadence revenue, has grown each year.

See now: Semiconductor shortages can impact in two ways

Last month, Synopsys raised its full-year guidance, driven by fiscal second-quarter sales and earnings that beat analysts’ expectations. In April, Cadence also raised its financial guidance for the year, helped by better-than-expected performance in the fiscal first quarter.

Chip design activity remains strong, thanks to complex next-generation chips from Intel Corp. INTC,
Advanced Micro Devices Inc. AMD,
Broadcom Inc AVGO,
and Marvell Technology Inc. MRVL,
according to JP Morgan’s Sur.

The acquisition of custom chip designs by cloud giant Alphabet Inc. GOOGL,

+3.85%, Inc. AMZN,
META by Meta Platforms Inc.,
Facebook and Microsoft Corp. MSFT,
as well as companies such as Apple Inc. AAPL,
Juniper Networks Inc. JNPR,
CSCO by Cisco Systems Inc.,
and General Motors Co.GM,
is also driving an increase in the number of chip engineers, Sur wrote. These companies need software tools for EDA chips, he added.

Against this backdrop, JP Morgan continues to see a compound annual revenue growth rate (CAGR) of 10% to 15% for Synopsys and Cadence, 80% to 90% gross margins, and a recurring revenue profile of 80% to more than 90%. “We believe EDA remains a very attractive part of the overall semiconductor value chain,” Sur wrote.

FactSet data shows that Synopsys and Cadence have returned 14.4% and 12.8%, respectively, versus the SPX of the S&P 500 index over the past year.
Decrease of 11.75% over the same period. Both companies had record deals on December 27, 2021, with Synopsys shares closing at $375.59 and Cadence shares at $191.65 on the day.

See now: Synopsys, Juniper Networks Form New Company to Deliver Silicon Photonics Platform

In April, Synopsys also announced an agreement with Juniper to create a new, separate company focused on open silicon photonics, providing technology for telecom, healthcare, datacom, high-performance computing, artificial intelligence, optical networking, and light detection and removal ( LiDAR or remote sensing) industries.

Out of 14 analysts polled by FactSet, 13 are Buy or Overweight Synopsys and one is Underweight the company. Of 15 analysts polled by FactSet, nine have a buy or overweight rating on Cadence, five have a hold rating and one has an underweight rating. These software companies are unsung winners in the semiconductor industry

Brian Lowry

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