An acceleration in demand for complex integrated circuits (ICs) and technologically advanced consumer electronics, along with the growing adoption of connected devices, such as smartphones, wearables, and smart home systems, are the major factors fueling the growth of the electronic design automation market. The global electronic design automation industry is expected to reach $18.1 billion by 2026, registering a 7.7% CAGR.

Although the industry saw a dip in its growth rate due to the COVID-19 pandemic and a semiconductor chip shortage, a trend in miniaturized electronic products is building a positive outlook by the market. Rising utilization of microprocessors, advancements in System on Chip (SoC) technology, and extensive research and development (R&D) activities should power the industry's growth further.

Therefore, we think fundamentally sound stocks in the electronic design automation space Synopsys, Inc. (SNPS) and Cadence Design Systems, Inc. (CDNS) are well-positioned to cash in on the industry’s strong growth potential.

Synopsys, Inc. (SNPS)

SNPS in Mountain View, Calif., provides software products and services that design and test integrated circuits. The company offers its Fusion Design Platform; Verification Continuum Platform; intellectual property (IP) solutions; Platform Architect solutions; and other services. It also provides electronics, financial services, automotive, medicine, energy, and industrial software tools and services.

This month, SNPS acquired Concertio Inc., a provider of AI-powered performance optimization software. The acquisition is another step in enhancing the SiliconMAX and the Synopsys integrated Silicon Lifecycle Management (SLM) Platform. With this acquisition, SNPS intends to expand the capabilities and benefits of the SiliconMAX SLM platform to address its customers' silicon and system health needs.

SNPS’ total revenue for its fiscal third quarter, ended July 31, 2021, increased 9.6% year-over-year to $1.06 billion. The company’s gross margin grew 10.5% from its year-ago value to $852.06 million. And its operating income came in at $201.92 million. Also, the company’s net income amounted to $198.39 million for the period.

Analysts expect SNPS’ revenue for its fiscal year 2021 to be $4.2 billion, representing 14% year-over-year growth. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. SNPS’ EPS is expected to increase 22.9% in the current year and 15.8% next year. Furthermore, the stock has gained 25.1% in price over the past nine months and 54.2% over the past year.

SNPS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

Also, the stock has an A grade for Quality, and a B grade for Stability and Sentiment. We’ve also graded SNPS for Growth, Value, and Momentum. Click here to access all the SNPS’ ratings. SNPS is ranked #16 of 51 stocks in the B-rated Technology - Hardware industry.

Click here to checkout our Semiconductor Industry Report for 2021

Cadence Design Systems, Inc. (CDNS)

Incorporated in 1988, CDNS in San Jose, Calif., is an electronic designer that provides software, hardware, services, and reusable, integrated circuit (IC) design blocks worldwide. The company's product categories include Functional Verification; Custom IC Design and Verification; System Interconnect and Analysis; and intellectual property (IP). Also, it offers services related to methodology and hosted design solutions, technical support, and maintenance services.

Last month, CDNS introduced its new Cadence Tensilica HiFi 1 DSP that delivers increased voice and music processing performance with optimal neural network capability in a compact footprint with ultra-low energy. This product should improve the user experience and extend the battery life for small battery devices such as TWS earbuds, hearing aids, Bluetooth headsets, smartwatches, and other wearables.

During its third quarter, ended October 2, 2021, CDNS’ total revenue increased 12.6% year-over-year to $750.9 million. The company’s income from operations grew 14.6% from its year-ago value to $194.03 million. Its net income rose 9.1% from the prior-year quarter to $176.31 million. Also, the company’s EPS increased 8.6% year-over-year to $0.63.

CDNS’ revenue is expected to increase 10.8% year-over-year to $2.97 billion in its fiscal year 2021. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. CDNS’ EPS is estimated to increase 13.9% in the current year and 11.6% next year. The company’s stock has surged 31.9% in price over the past six months and 59% over the past year.

CDNS’ POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. Also, the stock has an A grade for Quality, and a B grade for Sentiment and Stability.

In addition to the POWR Rating grades I’ve just highlighted, one can see CDNS’ ratings for Growth, Value, and Momentum here. CDNS is ranked #21 of 160 stocks in the Software – Application industry.

Click here to check out our Software Industry Report for 2021

SNPS shares were trading at $333.16 per share on Tuesday morning, up $3.32 (+1.01%). Year-to-date, SNPS has gained 28.51%, versus a 24.44% rise in the benchmark S&P 500 index during the same period.

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.

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