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Tensions between the two largest economies of the world - the U.S. and China - have been steadily on the rise in recent years. Frequent barbs have been exchanged between the two superpowers on issues ranging from trade to Taiwan and other hot-button issues. Now, the latest battlefield seems to be artificial intelligence (AI), as the U.S. Commerce Department this week clamped down further on its restrictions for chip exports to China.
With the U.S. taking deeper aim at the lucrative semiconductor industry in its latest trade war escalation, major chip stocks with outsized revenue exposure to China have been hit hard - and particularly AI chip giant Nvidia (NVDA), which is off 10% for the week.
But for investors looking to maintain exposure to this growth industry - while minimizing the overhang of rising geopolitical risk - there's more to semiconductors than AI chips. Here, we'll highlight two outperforming stocks that have limited exposure to China, and are leaders in the critical and expanding electronic design automation (EDA) space - a market that's expected to reach $22.21 billion by 2030, representing a CAGR of 9.1%.
Synopsys
Founded in 1986, Synopsys (SNPS) specializes in silicon design and verification, silicon intellectual property, and software security and quality. Synopsys also provides software and services for software development. Its current market cap stands at $73.9 billion.
Synopsys stock has outperformed the broader market significantly so far in 2023, rising nearly 47%.
The company's latest results for the fiscal third quarter were marked by growth in both revenue and earnings. Revenues for the quarter came in at $1.487 billion, up 19% from the previous year. Meanwhile, EPS of $2.88 improved 37.1% from the prior year, and topped the consensus estimate of $2.74. In fact, the company's EPS has surpassed expectations in each of the past five quarters.
Moreover, the company's revenues and operating cash flows have grown consistently over the years. Further, the company's management has committed to delivering double-digit revenue growth and 100bps of annual margin expansion over the long term.
Notably, the top market for SNPS by far is the U.S. - and at 20% of revenue as of the latest quarterly earnings, China is certainly a non-trivial market; however, it was still surpassed in 2022 by “Other” revenue, as well as combined Europe/Korea revenue.
Additionally, Synopsys remains well-positioned to benefit from the burgeoning generative AI domain with its market-leading position in the EDA space. By virtue of being a leader in the EDA space, the company provides the tools to design semiconductor chips for companies like Nvidia. Notably, Synopsys.ai is the industry's first full-stack AI-driven EDA suite.
Analysts are forecasting earnings growth rates of 25% for fiscal 2023, and 11% for FY 2024.
Overall, analysts have a “Strong Buy” rating on SNPS, with a mean target price of $515.73 - indicating an upside potential of roughly 7% from current levels. Out of 12 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy,” and 1 has a “Hold” rating.
Cadence Design
Cadence Design (CDNS) is another EDA company that draws most of its revenue from the U.S. market. Cadence's products and services enable system-on-a-chip (SoC) designers to create complex, high-performance chips for a wide range of industries, including consumer electronics, automotive, aerospace and defense, and communications.
The company's shares currently command a market cap of $66.6 billion, and Cadence stock has rallied 48.5% on a YTD basis.
In its latest quarterly results, Cadence reported revenues of $977 million - up 13.9% year-over-year - while EPS of $1.22 rose by 13% from the year-ago period. The earnings came in above analysts' expectations of $1.18. Notably, the company's EPS has matched or topped expectations in each of the past five quarters.
Looking back over the past 10 years, the CAGRs for Cadence's revenue and EPS are 10.50% and 7.38%, respectively.
Apart from its dominant position in the EDA market, Cadence has recently launched Virtuoso Studio, which provides an average productivity boost of 3x for designs in the notably complex analogue domain, and Allegro X AI, which leverages the latest innovations in generative AI to reduce PCB design turnaround time by 10 times.
Analysts expect Cadence to report earnings growth of 19.5% and 9% in fiscal years 2023 and 2024, respectively.
Overall, analysts have a “Strong Buy” rating for CDNS, with a mean target price of $259.42. This indicates an upside potential of about 8% from current levels. Out of 12 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Hold” rating.
