*Updated Cadence’s CEO is now Anirudh Devgan. Lip-Bu Tan transitioned to the role of executive chairman on December 15, 2021. *
There is a glut of semiconductors, so say bearish investors. They’re sort of right, yet it is not what you think. It is also the wrong way to look at the sector, and key businesses.
Executives at Advanced Micro Devices
Bears feel vindicated. Ignore them. Buy Cadence Design Systems (CDNS).
There is a lot to unpack. The semiconductor sector is at an inflection point, and it will never be the same again. The days are over of firms being stuck in their lanes, making generational microprocessors. Well, that is mostly true.
Intel
Think about the millions of desktop and laptop computers that were bought to work from home.
That’s not the future of semiconductors. It has not been for a long time. Bears simply have not realized this, yet.
The best companies are now building chips around specific software needs. And that business is booming.
Apple
Forward-looking firms such as Qualcomm
During her call with analysts Tuesday Lisa Su, AMD’s chief executive officer, said that its data center business is extremely strong, and there is no slowdown in sight. Sales for these chips in the quarter surged 83% year-over-year, to $1.5 billion.
AMD is also making good progress in its embedded segment, where sales in the quarter were $1.3 billion. This business serves clients in automotive, industrial, and advanced networking, like edge computing.
Cadence Design Systems makes software used by the semiconductor industry to design microprocessors, and help with software integration. The business is extremely profitable from the ground up. Current gross margins are 90%. Operating margins are 28%. And free cash flow is up 77% since 2020.
The San Jose, Calif.-based firm is led by Lip-Bu Tan, a graduate of the nuclear engineering program at MIT. (*Updated* Tan is now the Executive Chairman as of December 15th 2021 *Update*). Tan is also the founder of Walden International, a venture capital firm that makes early stage investments in chip design firms, a facility that serves Cadence well. Relationship Science, a Silicon Valley analytics firm, has consistently named Tan among the most connected executive in technology.
Cadence touches every part of the semiconductor sector, small and large. The company builds the software those businesses need to scale new processes, and to integrate with ever-evolving software applications.
I began recommending Cadence in 2017 when shares were only $25.60. Since that time shares have zoomed to $183.45, a sevenfold increase. These gains are certain to persist as the era of bespoke silicon leads to even more demand for design software.
It’s popular now to group all semiconductor companies in the same basket. Bears want to believe that a glut in the chips used in PCs translates to data centers and advanced networking. This simply is not so.
Investors should consider buying Cadence shares to take advantage of the important differences.
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