A battle is brewing in an under-followed part of the artificial intelligence (AI) industry: chip design software. Several merger and acquisition deals have been announced, and a mega-merger is pending between electronic design automation (EDA) leader Synopsys (NASDAQ: SNPS) and Ansys (NASDAQ: ANSS). Shortly after that was announced, the second EDA software suite, Cadence Design Systems (NASDAQ: CDNS), revealed its new supercomputing platform for simulating electronic systems.
Not wanting to get left behind, Japanese chip manufacturer Renesas (OTC: RNECY) announced its intention to acquire smaller EDA software provider Altium (OTC: ALMF.F). Is something big brewing in the AI market?
Renesas looks for a software boost
Renesas is an integrated device manufacturer, a company that both designs and manufactures semiconductors. It's a hybrid business model that has been making a comeback in recent years. Besides Japan emerging as a top destination for manufacturing in the East, Renesas can thank the electric vehicle (EV) revolution for its resurgence, as well as a myriad of other more mature manufacturing processes (not leading-edge chips for things like data center AI) for chips in industrial and power applications.
Data by YCharts.
Among some other smaller acquisitions to bolster its power chip portfolio, I wrote last year about Renesas' deal with Wolfspeed(NYSE: WOLF) to purchase silicon carbide (SiC) wafers for use in next-gen applications like EV motors.
But the purchase of Altium, a small competitor to the EDA software giants Synopsys and Cadence, is something else entirely. Tiny Australia-based Altium (which, notably, counts Wolfspeed as a chip design customer) generated revenue of just $139 million in U.S. dollars in the first half of its current 2024 fiscal year. And yet Renesas will be shelling out A$9.1 billion ($6 billion in U.S. dollars, using exchange rates on April 5, 2024). That's a hefty price premium.
Data by YCharts.
Renesas' stated rationale is to boost the software and digital tool capabilities it offers its clients, as many of those customers (automakers, for example) are non-techies who may need help implementing next-gen electronics.
A big wave of AI coming?
As of right now, Nvidia's (NASDAQ: NVDA)data center AI systems are all the rage as companies are looking to use their data to "train" new AI systems. But in the decade to follow, all of those AI systems will need to go somewhere in order for users to benefit from their creation.
That's likely where Renesas sees massive opportunity by purchasing Altium, and competing with Synopsys and Cadence in electronics system design. Semiconductor manufacturing companies have a pathway to sustained growth thanks to customer interest in embedding intelligent computing systems across a broad ecosystem of devices, from cars to automated factory equipment to smart home devices.
Image source: Altium.
All that new AI embedded in devices themselves, rather than housed in data centers, is going to need far more sophisticated hardware. It's also going to need more energy-efficient hardware, like the type Renesas has been working on (again, with the Wolfspeed deal). Renesas could secure itself a seat at the table for years to come by combining not just the chips, but also the software, to make those AI devices a reality.
Renesas could be a hidden growth stock in the AI race. Shares trade for about 13 times trailing 12-month earnings and free cash flow, a potential bargain if it can keep building a head of steam in its semiconductor manufacturing and design business for autos, industrial equipment, and consumer electronics.
Should you invest $1,000 in Renesas Electronics right now?
Before you buy stock in Renesas Electronics, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Renesas Electronics wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 4, 2024
Nicholas Rossolillo and his clients have positions in Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool has positions in and recommends Altium, Cadence Design Systems, Nvidia, Synopsys, and Wolfspeed. The Motley Fool recommends Ansys. The Motley Fool has a disclosure policy.
