Introduction to EDA
What is EDA?
Electronic Design Automation (EDA) refers to the use of computer software tools to automate the process of complex electronic product design (mainly referring to the design of semiconductor chips) to shorten product development time.
In more detail, the work of EDA software covers the following series of automated processes necessary for chip design:
- Logic design
- Circuit system design
- System simulation
- Performance analysis
- Design the circuit layout diagram of the printed circuit board
What makes EDA special?
I mentioned in the previous article “The lucrative semiconductor supply chain” that there is a group of special semiconductor design software in the semiconductor supply chain, mainly referring to EDA. EDA software can be said to be the most upstream of the entire modern semiconductor industry. Without it, there would be no modern semiconductors.
The necessity of EDA
Because semiconductor designs are becoming more and more complex, the work of chip design is of course becoming more and more complicated day by day. It is no longer possible for modern chip design to be like half a century ago when semiconductors were just invented, only a few people could start from scratch and take care of all the functions on a chip; it is necessary to rely on EDA software to assist in completing the entire process, the complex, huge, and complete design process of the chip.
EDA is the starting point of the chip
What I have in my book about EDA
In my recently published book “The Rules of 10 Baggers“, I discussed EDA, as well as Synopsys, Cadence, and Mentor Graphics, the three major EDA oligopoly companies:
- Section 3-2, page 123, discussion of semiconductor companies
EDA vendors dominate TSMC fate
Because EDA software is located at the most upstream of semiconductors, TSMC (US stock code: TSM) is a semiconductor foundry. If EDA software cannot be obtained, it means that all subsequent manufacturing processes related to the factory will not be possible.
Embargo on advanced process EDA software to China
This is why the U.S. Department of Commerce has added a ban on EDA software to the new ban on Chinese semiconductors in 2022: it stipulates a restricted range: the EDA software tools necessary for the design of GAAFET circuits necessary for advanced semiconductors are prohibited from exporting to China.
The GAAFET (Gate-All-Around FET) is the key to breaking through the technology node of 3nm and below in the wafer foundry process.
The three major oligopolists in the EDA market
But the global EDA market is dominated by three little-known but crucial companies to the semiconductor industry: Synopsys (ticker: SNPS), Cadence (ticker: CDNS), and Mentor Graphics (ticker: SIEGY) has been acquired by the Siemens Group. Therefore, from any point of view, these three companies are good investments in the semiconductor industry (or software industry).
The three major oligopoly companies have a global EDA market share of about 78%, and a market share in China as high as 85%.
The Next Wave of Computing Innovation Is Happening
Advanced packaging
To push computing performance to new levels, chip designers are adopting new ways of packaging semiconductor systems–such as chiplet technology, which packs multiple smaller chips into a larger integrated circuit. Some chip designers, like Intel (ticker: INTC ), believe that multiple suppliers will be involved in supplying parts for the chiplet computing architecture model.
Integration of IP
Other innovations include embedding software or other designers’ existing excellent intellectual property licensed IP into the chip early in the design process; it can shorten the chip design time and quickly increase the chip’s functions, which can also be used to improve chip performance. Software technologies also help speed development time with capabilities such as molecular-level simulations of chips, artificial intelligence tools to solve design problems, and the use of pre-designed, customizable circuits to expedite overall design.
The more complicate the better for EDA
All of this requires a sophisticated suite of software to coordinate all the engineering teams and stakeholders involved in designing modern computing systems. This is where Synopsys and Cadence come into play. There are many similarities in the work of the two software companies, but like Mentor Graphics (now owned by German industrial conglomerate Siemens), they are both important parts of the chip industry process. Whether you are a semiconductor designer, chip manufacturer, computing system assembler or software engineer, Synopsys or Cadence is likely to be an important part of the software lineup used.
Software Subscriptions Licensing Model
And since Synopsys and Cadence mostly adopt the software subscription licensing model, they can provide stable growth figures. This is in stark contrast to many other companies in the semiconductor industry, which have distinct boom and bust cycles that ebb and flow with economic or semiconductor sales boom and bust cycles.
But the EDA software where Synopsys and Cadence are located will not. Due to their similarities, Synopsys and Cadence stock performance have moved in tandem with each other, but both handily beat the market in 2022. When it comes to Synopsys and Cadence , it can’t help but remind people of the two major online credit card providers Visa (ticker: V) and Mastercard (ticker: MA). Yes, the status is the same.
Put them in watch list
Due to the high valuation, I have been hesitant to buy Synopsys or Cadence for a long time, holding a wait-and-see attitude. But as the bear market in 2023 is likely to continue and the next wave of computing technology begins to be commercialized, investors should be able to watch closely.
Valuation
Synopsys trades at about 32 times free cash flow and Cadence 42, both well deserved. Both companies are growing at a steady pace, are highly profitable, have strong balance sheets, and both continue to repurchase shares.
| Metric (December, 2022) | Synopsys | Cadence |
|---|---|---|
| Revenue growth for the most recent quarter | 11.5% | 20% |
| Operating margin for the trailing 12 months | 23.1% | 30.8% |
| Trailing 12 Months Free Cash Flow Margin | 31.5% | 31.7% |
| Share repurchases over the past 12 months | US$ 862 million | US$ 865 million |
| Total cash and short-term investments | US$ 1.57 billion | US$ 1.09 billion |
| Total debt | US$ 20.8 million | US$ 798 million |
About Synopsys
From this table, you may think that Synopsys’ financial and valuation indicators are worse, and there are reasons for this. Since Synopsys recently acquired OpenEye Scientific, it also assumed some new debt as a result. Synopsys’ sales also rose 21% in the recently ended fiscal 2022, so the two companies’ growth profiles are much closer than the most recent quarter suggested.
EDA will hold the key in the next decade
But please don’t get me wrong, the next decade’s advances in computing technology are already well underway, and computing power relies heavily on advanced semiconductor chips. Synopsys (please see my post of “How does Synopsis, the EDA oligopoly, make money?“) and Cadence (please see my post of “How does, the EDA oligopoly, Cadence make money?“) will play a key role in it.
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