Cadence Design Systems , a U.S. company that provides electronic design software to chip makers, has been “completely missed” by investors, according to Clare Pleydell-Bouverie, fund manager at Liontrust. The technology investor explained that Cadence is part of a rare duopoly with only one competitor, Synopsys . Liontrust’s Global Technology Fund , with $265 million in assets, is invested in both stocks with around 3.3% allocated to each as of April 30. “We rarely hold competitors side by side,” she told CNBC’s Arabile Gumede on the latest Pro Talks . “But because this is a functioning kind of duopoly, it does warrant that.” Cadence recently announced, alongside its quarterly earnings, new tools that could help chip makers, such as TSMC , GlobalFoundries and Global Unichip , run more their manufacturing processes efficiently. In April, Cadence launched its Protium X3 system , a tool for engineers to find and fix problems in the design of computer chips before they are manufactured. In addition, the company also launched its Palladium Z3 system, which is expected to emulate software that will run on chips before they are manufactured. The company says the systems are designed to work together and reduce the cost of designing and testing chips. “We think the market has really underappreciated this,” Pleydell-Bouverie said. Cadence shares are up 5.12% this year and have risen 25% over the past 12 months — although this growth is much more muted than many other chip-related stocks. “When we think about the long term, we think about what this step up and product innovation from Cadence is actually going to achieve if we’re going to see chips five times the size of Blackwell come to market,” she said, referring to Nvidia ‘s latest and most powerful AI chip . “Cadence is going to be the key enabler of this, and that’s been completely missed by the market.” Pleydell-Bouverie also pointed out that Cadence benefits from a “dual growth driver” — companies designing more chips to bring AI capabilities to consumers and Cadence using AI to improve its own chip design process and efficiency. Cadence already boasts gross margins of nearly 90%. Over the past decade, the company’s pre-tax net profit margin has also risen steadily to more than 30%, according to FactSet data. Pleydell-Bouverie also flagged that around 80-85% of Cadence’s revenue is recurring, making it a “mission-critical component” of the semiconductor design process. Cadence’s shares dipped after its first-quarter earnings. It revealed that revenue slipped to $1.01 billion compared to $1.02 billion a year ago. I n addition, the company tempered Wall Street estimates looking ahead, saying it expects second-quarter revenue to come in between $1.03 billion and $1.05 billion. Analysts remain broadly bullish on the stock, however , with 67% rating it as a buy and 28% maintaining a hold rating. The average price target of $322 implies a 12.5% upside from the current share price, according to FactSet data.
The market has ‘completely missed’ this critical AI chip stock, says fund manager
Jun 4, 2024
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