These software companies are unsung winners in the semiconductor industry

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These two software companies may not be household names, but J.P. Morgan continues to see a 10% to 15% revenue compound annual growth rate (CAGR) for them respectively.

Mention semiconductors and chip giants such as Intel Corp., Advanced Micro Devices Inc. and NVIDIA Corp. spring to mind, but there are other, less high-profile companies, operating in the space that deserve attention.

Synopsys and Cadence build Electronic Design Automation, or EDA, software, a crucial tool for chip design engineers. In a recent note, J.P. 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, which don’t get cut in downturns.

Sur pointed out that over the past 11 years, which spans three semiconductor down cycles and three years of semiconductor revenue declines, EDA revenues, and therefore Synopsys and Cadence revenues, have grown every year.Last month, fueled by fiscal second quarter revenue and earnings that topped analysts’ expectations, Synopsys raised its full-year guidance. In April Cadence also raised its financial forecast for the year, boosted by better-than-expected performance in its fiscal first quarter.

The adoption of custom chip designs by cloud giants Alphabet Inc. GOOGL, +0.68% GOOG, +0.58%, Amazon.com Inc. AMZN, +3.20%, Meta Platforms Inc.’s META, +1.86% Facebook and Microsoft Corp. MSFT, +2.26%, as well as the likes of Apple Inc. AAPL, +2.16%, Juniper Networks Inc. JNPR, +0.21%, Cisco Systems Inc. CSCO, -1.47% and General Motors Co. GM, +0.49%, is also driving an increase in the number of chip engineers, Sur wrote. These companies have a need for EDA chip software tools, he added.

 

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