Cadence and Synopsys May Be Next Nvidia Thanks To AI
Cadence Design Systems had a strong performance in 2023, fueled by AI growth. Will it continue to shine or was last year an isolated case? l Source: Michael M. Santiago/Getty Images
Key Takeaways
- Cadence achieved significant growth in revenue, operating margin, and net profit in 2023.
- Cadence’s stock price has also surged in recent years, reflecting investor confidence in its future prospects.
- But the market raised questions about the sustainability of its growth and the competitive landscape with Synopsys.
Artificial intelligence (AI) emerged as the leading player that significantly bolstered the expansion of Cadence Design Systems’ operations in 2023. But the market, after having welcomed the results, wonders if the strong performance is just an isolated case or can be followed by another strong year.
A similar trend appears to be unfolding with Synopsys , another company focusing on AI, which is trading at lower multiples compared to its peers. Both companies aspire to emulate Nvidia success in the stock market, yet achieving leadership in the AI domain remains a considerable journey ahead for them.
Cadence 2023 Results
Cadence, listed on the Nasdaq, achieved a turnover of $4.1 billion in 2023, marking a rise of approximately 15% compared to the previous year. Correspondingly, its operating margin (non-GAAP) increased to 42%. Additionally, net profit experienced growth , settling at $1.04 billion, up from $849 million in 2022.
Upon closer scrutiny, the situation presents nuances. Analysis from Bloomberg Terminal reveals a progressive trend in Cadence’s financial metrics over the years. Adjusted revenue stood at $1.14 billion in 2011, surpassing $2 and $3 billion milestones in 2018 and 2022, respectively. Similarly, net profitability, consistently adjusted, rose from $68.9 million in 2011 to over $600 million in 2020, settling at $896.6 million two years ago.
historical data suggests that the 2023 trend, while noteworthy, cannot be an anomaly thus far. Moreover, the market has long been cognizant of Cadence’s trajectory. Over the past 12 months, the company’s stock has surged by 51%, a trend substantiated over a broader timeframe. Over a five-year period, the increase stands at 390%, while over a decade, performance exceeds 1,930%.
Despite comparable performances in other chip sector stocks, Cadence’s sustained dynamics defy categorization as sporadic events. However, the reality is not as straightforward. Notably, the pace of revenue growth has seen fluctuations. While Cadence experienced a 22% expansion in 2022, this rate moderated to 15% the following year, signaling a potential slowdown in momentum. Looking ahead to 2024, the group anticipates a further deceleration, with projected growth around 12%.
Contextualizing these figures, it’s crucial to consider the broader market landscape. The chip sector, per Omdia data , experienced a 9% decline in 2023. Specifically, Electronic Design Automation (EDA), Cadence’s primary market, is estimated to have a weighted average annual growth rate (CAGR) of 8.6% between 2023 and 2033.
Boost From AI
In general, the company specializes in producing software and platforms for designing, simulating, and assembling electronic and semiconductor systems. More specifically, the company segments its revenue by product categories. At the end of 2023, the areas that generated the highest sales (27%) were “Digital IC Design and Signoff” and “Functional Verification, Including Emulation and Prototyping Hardware.”
The first segment focuses on products and services dedicated to the design and final verification of digital integrated circuits (Signoff being the phase where the chip is validated in terms of technical and production requirements).
The second area includes a range of activities, from hardware simulation to physical integrated circuit design using advanced platforms. Alongside software for custom semiconductor design (22% of revenue), it’s noteworthy that IP and system design – each contributing 12% to last year’s revenue – are also significant segments.
Given such a diverse business structure, it’s evident why AI – which demands increasingly powerful, efficient, and fast chips – has propelled the company’s financial performance, welcomed by the market.
The necessity for major AI chip manufacturers to develop cutting-edge technology has facilitated demand for Cadence’s products.
It’s therefore no coincidence that the company counts industry giants such as Nvidia, Intel, or Arm among its clients. These companies enable Cadence to participate in the AI super cycle. A trend that, according to the company itself, the group leverages in three ways. The first is to provide tools to create AI infrastructure. The second is the integration of AI into its products (for example, Cerebrus for automatic design). The third, finally, is the application of new algorithms to sectors such as biosciences. A context in which the market accessible to Cadence expands significantly.
Synopsys Has A Trading Gap To Fill
Cadence holds the second position in the semiconductor sector in the USA, trailing behind Synopsys in terms of market share, intensifying the competition for securing orders.
Due to this competitive landscape, Cadence has pursued several acquisitions. In early March, it acquired Beta Cae for $1.2 billion, following which, in January, it bought Invecas .
According to data from Seeking Alpha’s database , Cadence’s forward-looking non-GAAP P/E for 2024 stands at 52.4 timed, surpassing both the sector average and its direct competitor Synopsys, which has a ratio of 42.5. Similarly, Cadence’s PEG ratio, indicating the ratio between price and profit normalized on annual estimates of profit growth in the medium to long term, is higher at 3.33 times compared to Synopsys’ 2.32 times. This suggests that individual investors should exercise caution and diligence, particularly concerning the growth dynamics of turnover and profitability.
To close the gap, particularly in the stock market, with other AI developers, Synopsys has acquired Ansys for $35 billion, forming a “pervasive intelligence” giant with aspirations for leadership in silicon system design solutions.
Synopsys anticipates achieving approximately $400 million in cost synergies by the third year post-closure and approximately $400 million in revenue synergies by the fourth year post-closure, with further increases expected to exceed approximately $1 billion annually in the long term. Synopsys specializes in Electronic Design Automation (EDA) solutions while Ansys is known for its engineering simulation software.
Goldman Sachs Unveils Roadmap for AI Boom: Nvidia Just The Beginning
