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These Stocks Called Unsung Heroes Of Semiconductor Industry Growth

A Wall Street firm initiated coverage of two leaders in electronic design automation, calling the technology the “unsung hero” behind the secular growth of the semiconductor industry.




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Needham analyst Charles Shi started coverage of Cadence Design Systems (CDNS) and Synopsys (SNPS) with buy ratings. He set a price target of 183 on Cadence stock and 360 on Synopsys stock. Shares of both EDA software makers rose on Wednesday.

In afternoon trading on the stock market today, Cadence stock climbed 0.8%, near 160.10. Synopsys stock rose 1.4%, near 315.40.

In a note to clients, Shi said he has a positive long-term view of the EDA segment. Cadence and Synopsys “provide the unique software angle to invest in the secular growth of semiconductors,” he said.

Semiconductor Industry Trend: Rising Complexity

The rising complexity of semiconductors has led to higher capital spending by chipmakers. That has boosted prospects for EDA software firms as well as semiconductor equipment vendors, Shi said.

“In our view, greater design complexity will tie directly to faster adoption of EDA, as the semiconductor industry is increasingly relying on design-technology co-optimization to move scaling ahead as process innovation became more challenging,” Shi said.

Cadence and Synopsys also are helped by the fact that more tech companies are designing their own semiconductors. Consumer electronics giant Apple (AAPL) is a prime example of the trend, Shi said.

“These systems companies not only include the Apples of the world, but also hyperscalers, automotive, aerospace, and defense companies,” he said. “As we see it, the customer base of the EDA industry is rapidly broadening in an irreversible way.”

Cadence, Synopsys Are IBD Long-Term Leaders

Cadence and Synopsys have transitioned to recurring, subscription-based businesses from an upfront, perpetual licensing model. That has made their sales more stable and predictable.

“We view the EDA companies as the unsung heroes behind the semiconductor industry’s success,” Shi said. “Their stocks will be rewarded by investors who are looking for the secular growth of semiconductors from a unique software angle.”

Cadence stock and Synopsys stock are both in the IBD Long-Term Leaders Portfolio.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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