2 Top-Rated Semiconductor Stocks Set to Outperform

The semiconductor industry is constantly evolving, with chip designs getting more complex and advanced. At the core of this evolution is Electronic Design Automation (EDA) software, the unsung hero behind the creation of the cutting-edge chips that power our devices. 

As the demand for advanced chip designs continues to rise, two top-rated semiconductor stocks, Synopsys (SNPS) and Cadence Design Systems (CDNS), are poised to benefit from this trend. These EDA giants together control about 60% of the global EDA market, positioning them to capitalize on the industry's growth - which is projected to reach $27 billion by 2034.

As chip designs become more intricate, the demand for advanced EDA tools grows, positioning Synopsys and Cadence Design Systems to benefit significantly. Investment firm Baird has recognized this potential, rating both companies “overweight” and predicting growth that outpaces the market for these EDA standouts. This endorsement is based on their strategic positioning to capitalize on the evolving needs of the semiconductor industry, as the artificial intelligence (AI) takeover continues to drive demand for faster, more efficient chips.

With this AI chip demand rising across industries like 5G communications, data centers, and autonomous vehicles, here's a closer look at the forecast for SNPS and CDNS.

#1. Synopsys, Inc. (SNPS)

Synopsys, Inc. (SNPS) is a top player in electronic design automation (EDA) software, which is essential for designing and testing integrated circuits (ICs). The company operates in three main areas: Design Automation, Design IP, and Software Integrity, providing tools and services that help semiconductor companies optimize their designs for power, performance, and efficiency.

SNPS stock has gained 17.6% in 2024, roughly in line with the 19% advance of the broader Nasdaq Composite ($NASX). Over the last two years, Synopsys shares have doubled in value.

With a market cap of $92 billion, SNPS is priced for growth, with a forward price/earnings ratio of 46.3 and a price/sales ratio of 15. While these valuations might raise eyebrows, these premiums reflect expectations for above-average growth, echoing Baird's bullish forecast for the EDA market leader.

In late May, Synopsys reported fiscal Q2 2024 results that missed estimates, with revenue of $1.45 billion up 15% year-over-year, and non-GAAP EPS of $3.00 showing a 26% increase. Wall Street was looking for revenue of $1.51 billion on adjusted earnings of $3.03 per share. Looking ahead, the company raised its full-year revenue forecast to a range between $6.09 billion and $6.15 billion, with non-GAAP EPS expected to range from $12.90 to $12.98.

On the innovation front, Synopsys has launched a production-ready multi-die reference flow powered by its Synopsys.ai EDA suite and Intel (INTC) Foundry's advanced packaging technology. This new solution accelerates the development of multi-die designs, crucial for high-performance computing and AI applications. 

Additionally, Synopsys has launched the industry's first complete PCIe 7.0 IP solution, which will empower chipmakers to address the demanding bandwidth and latency requirements of transferring massive amounts of data for compute-intensive AI workloads.

Analysts are bullish on SNPS stock, with 12 out of 14 in coverage suggesting a “Strong Buy,” 1 suggesting a “Moderate Buy,” and 1 suggesting a “Hold.” The mean target price is $633.78, indicating a potential upside of about 5% from the current price.

#2. Cadence Design Systems, Inc. (CDNS)

Cadence Design Systems (CDNS) is another major player in EDA software, hardware, and intellectual property (IP) solutions. They provide a comprehensive suite of tools and services that help semiconductor and electronic system companies design, verify, and implement complex integrated circuits and systems.

CDNS stock has gained 15.5% so far this year, and the shares are up 34.1% over the past 52 weeks. 

Cadence's market cap is $84.7 billion. With a forward P/E ratio of 52.41 and a price/sales of 18.55, investors are paying a premium for its expected growth, relative to the stock's historical valuations.

In late April, Cadence reported strong Q1 2024 results, with revenue of $1.01 billion matching estimates, and non-GAAP EPS of $1.17 beating the consensus. Despite a slight decline in operating margins compared to the previous year, the company secured a record Q1 backlog of $6.0 billion. 

Despite tepid Q2 guidance, Cadence expects full-year revenue between $4.56 billion and $4.62 billion, with non-GAAP EPS ranging from $5.88 to $5.98. 

Cadence has made significant strides in the tech industry, expanding its system IP portfolio with the Cadence Janus Network-on-Chip (NoC), and announcing a collaboration with Samsung Foundry to advance AI and 3D-IC semiconductor designs. These innovations are crucial for managing high-speed communications and accelerating design processes.

It's worth pointing out, however, that Cadence operates in a highly competitive industry with significant customer concentration. The company's growth could be impacted if key customers switch to competitors, or if there's a slowdown in chip design activity.

Analysts are generally voting for a “Strong Buy,” however, based on 9 out of 13 ratings. One more broker suggests a “Moderate Buy,” and 3 suggest a “Hold.” The mean target price is $327.92, indicating a potential upside of 3.8% from the current price.

Capitalizing on Expected Growth in EDA Stocks

In conclusion, Synopsys and Cadence Design Systems are two EDA software giants that have consistently demonstrated strong financial performance, innovative product offerings, and positive analyst sentiment. As the semiconductor industry continues to evolve, these companies are well-positioned to capitalize on the growing demand for advanced chip design solutions, making them attractive investment opportunities for investors seeking exposure to this dynamic sector.