The stock market continues to show bullish momentum, with technology companies emerging as the main winners, as they did last year. Despite some volatility in late summer, the NASDAQ index is up 24% this year and remains broadly trending upward.
While industry giants like Nvidia dominated the headlines, Berenberg analyst Nay Soe Naing focused attention on under-the-radar names in chip software.
To dig deeper, we used data platform TipRanks to gauge Wall Street sentiment on two such stocks recommended by Naing. Both have buy ratings and promising upside potential. Let’s dive into the details, along with key insights from the Berenberg analysis.
Synopsis (SNPS)
The first company we’ll look at here, Synopsys, is a specialist in electronic design automation, with a focus on silicon design, the important first step in the silicon semiconductor chip manufacturing process. The company provides solutions for silicon design and verification, silicon intellectual property, and system verification and validation, and bases its solutions on artificial intelligence (AI) and software-defined systems. Synopsys prides itself on the fact that its technology, and the technology and software solutions it provides, enable the innovations behind many of today’s big headlines – including autonomous vehicles, machine learning and high-speed communications.
In recent weeks, Synopsys has made announcements that show it is both expanding and streamlining its operations. In terms of streamlining, the company sold its optical solutions group to Keystone Technologies, a leader in design and emulation test solutions. The terms of this deal were not disclosed. And in terms of expansion, in late September Synopsys entered into an agreement with TSMC, the world’s second-largest chip manufacturer by market capitalization and third-largest by revenue, to provide advanced EDA and IP solutions to support TSMC’s most advanced technology process. and production lines.
Synopsys may not be a household name, but it is big business. The company has more than 35 years of experience, employs more than 19,000 people and generated more than $5.8 billion in revenue through calendar year 2023.
In the most recently reported quarter, for the fiscal 3Q24, the company raked in $1.526 billion in revenue, representing a gain of more than 13% year over year and beating forecasts by $10 million. Operating income came in at $3.43 per share on non-GAAP measures, up 27% year over year and exceeding expectations by 14 cents per share. Synopsys followed these good results by targeting 15% annualized revenue growth for the 2024 financial year; to achieve that would be a company record.
For Berenberg analyst Naing, the key here is this company’s solid position as a leader in its niche. He writes: “Synopsys, like its peers, is benefiting from the innovation-driven secular tailwind in the semiconductor industry. However, as the largest provider of semiconductor design solutions in the world, and with a differentiated product portfolio that is more indexed to higher growth product markets, and unparalleled in terms of innovation, we believe that Synopsys’ medium-term growth potential is superior to that of its competitors, including its direct competitor Cadence.”
Speaking about his own results, Naing says of Synopsys’ prospects: “While Synopsys’ profit margins may not be at the same level as some other industry leaders, the company operates with incremental margins that are among the highest in the industry. In our view, Synopsys’ exceptional financial potential deserves a multiple premium that is valued more highly than is currently the case.”
Naing initiates his company’s coverage of SNPS with a buy rating, and his $660 price target suggests the stock will gain 31% over one year. (To view Naing’s track record, click here)
The Strong Buy analyst consensus on Synopsys is unanimous, based on 10 recent ratings from The Street. The company’s shares are trading at $504.69 and the average price target of $650.56 implies a potential upside of 29% over one year. (To see SNPS stock forecast)
Cadence Design Systems (CDNS)
Next up is one of Synopsys’ main competitors, Cadence Design Systems. Cadence has been designing electronic systems since the early 1980s and is known for its software expertise. The company’s strategy is called Intelligent System Design and is used to deliver the best in software, hardware and IP protection. The company’s services are used in a wide range of silicon-based technologies, including critical components such as semiconductor chips and integrated circuits. boards and in industries from telecom to aerospace to life sciences.
Cadence saw revenue of $4.09 billion last year, generated through a network that spans 26 countries around the world and employs more than 11,000 people. The company’s product and service lines include analog and digital IC design; system verification; IC packaging and PCB design; Multiphysics and CFD analysis; and molecular modeling and biosimulation. The company’s work results in a broadly integrated range of end-to-end design solutions that are essential for today’s electronic designers to produce innovative products.
This month alone, Cadence committed to participate in the imecAutomotive chiplet program, a collaborative effort to develop and produce the chiplets and chipsets that will power the next generation of cars and enable fully autonomous vehicles. In addition, Cadence also announced that it will now integrate Nvidia NeMo and NIM microservices into its own generative AI applications, enhancing its own ability to innovate in semiconductor design.
On the financial side, Cadence saw Q2 2024 revenue of $1.06 billion, $20 million better than expected and up 8.5% year over year. Quarterly earnings per share of $1.28 in non-GAAP figures beat forecasts by 5 cents per share. Looking ahead, Cadence ended the second quarter with a backlog of work totaling $6 billion.
Opening his report on Cadence for Berenberg, Naing first points out the company’s solid position in the industry, saying: “Cadence, as one of the world’s largest providers of semiconductor design solutions, plays an important role in driving innovation in the semiconductor industry. As such, it benefits from the semiconductor industry’s structural trends driven by technological advancements. At the same time, Cadence’s business, which is driven by R&D spending, is protected from the cyclicality of the semiconductor industry.”
The analyst then outlines an optimistic path for Cadence in the year ahead: “Also thanks to its best-in-class product portfolio and operating model, Cadence is outgrowing its competitors and offering one of the highest profitability potentials of its peer group. In fact, we believe Cadence will outgrow the competition even faster than in recent years as it continues to leverage AI-powered semiconductor design capabilities.”
Unsurprisingly, this view comes with a Buy rating on the stock, and Naing’s $320 price target indicates he’s confident in a 21.5% one-year upside.
Like Synopsys above, Cadence has recorded 10 recent Wall Street reviews. These include 8 to Buy, and one to Hold and one to Sell, for a consensus rating of Moderate Buy. The shares are trading at $263.03, with an average price target of $319.33, almost identical to Naing’s target. (To see CDNSstock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
