Wall Street Hates EDA!
Wall Street has never really liked EDA, more out of ignorance than anything else. Jim Cramer doesn’t know CDNS, and now Douche Bank AG says SNPS “makes software for testing semiconductors”, followed by even more dissuasion: “despite glimmers of optimism creeping into the semiconductor industry, spending on the kind of testing products Synopsys makes remains tepid.” Good grief!
I track roughly 500 semiconductor companies in Silicon Valley through various relationships and online resources. One thing I can tell you is that semiconductor companies big and small are streamlining operations. Read my EDA is DEAD post and you will see my bullish view on Fabless ASIC companies, none of which are public, yet.
Commercial semiconductor intellectual property (IP) will continue to make big money over the next few years. Semiconductor companies around the world are outsourcing IP at an accelerated rate. A similar thing happened in the 1990’s with physical IP which includes standard cell libraries, static memories, and I/O cells, the building blocks of modern semiconductor design. The result being world class IP companies such as Artisan Components, Denali, and Virage Logic. Remember, Artisan sold to ARM for close to $1B? Virage Logic is still in play, more on that next time.
Unfortunately physical IP is now offered free by the foundries in most cases since the relationship between the manufacturing process and physical IP is quite intimate. Now the growth market is interface IP such as DDR, PCI, USB, HDMI, etc… and not just the IP itself but also the verification of that IP (VIP). Specifications for interface IP change at a rapid pace so this is a very fast moving market.
Back to the stock picks, Synopsys is both an EDA and IP/VIP company with the largest single collection of semiconductor IP available today. It is sold on an “Enterprise” basis meaning that you pay a subscription fee and can use all the IP you want. Synopsys also has a dominating collection of EDA software which covers the entire semiconductor design flow. Synopsys is now closing “Primary EDA Partner” deals with the top semiconductor companies, also an all-you-can-eat model (both covered in the EDA Pricing Fail Blog). Synopsys is clearly following the MonopolySoft (MSFT) business model.
Synopsys recently posted a 23% earnings jump in the worst economy known to us personally, but countered with a reduction in yearly revenue: “Synopsys now sees revenue for the full fiscal year coming in between $1.35 billion and $1.38 billion, down from a previous estimate of $1.37 billion to $1.40 billion”. Synopsys has a market cap of $2.8B, $800M in cash, no real debt, and 91% of the shares are held by Institutional & Mutual Fund Owners.
Aart de Gues is hedging his bets here, trading a small Q3 fail for an end of year win. Bottom line: If you read my blog, if you agree that the economic recovery has started, if you fully understand the competitive landscape of the EDA and IP markets, SNPS is a safe buy @ < $20.
Not discounting the ignorance of Wall Street, but EDA has done a very poor job of explaining what it does to them. Marketing efforts were always under funded but are almost non existant now and what is left is targeted only at engineers. The only source of information available on the real value of The industry was found in the tech press that no longer exists. If EDA wants some love from Wall Street it needs to hire some real communicators.
Folks may not understand the term ‘electronic design automation’ from the outset but most people do grasp ‘computer-aided design’, a term applied in many domains. The EDA sector may have shot itself in the foot by limiting references on CAD to the PCB space.