Sunday , 21 July 2024

Move Over Nvidia! The Next Wave Is In Custom Designed AI Chips

Nvidia has seen a remarkable 252% increase in its stock value year-to-date (as of November 20th), largely due to a significant rise in demand for its versatile AI chips designed for a broad range of applications. This trend, however, is now moving towards specialized AI applications, which necessitate the creation of tailored AI chips and this shift has brought Electronic Design Automation (EDA) software to the forefront. Let’s delve into what EDA software is, its projected market growth, and the companies that are likely to benefit from this industry evolution.

An original article by Lorimer Wilson, Managing Editor of – Your KEY To Making Money!

What’s EDA Software?

In short, EDA software acts as a blueprint tool for the semiconductor industry, ensuring that chip designs are functional and meet the required performance criteria. As a result, the EDA software market is on the cusp of a significant expansion, driven by major tech companies like TeslaAmazonMicrosoft, and Alphabet that are all transitioning from Nvidia’s more generic AI chips to creating their own complex AI chips. The focus is now shifting towards EDA software companies such as  Synopsys, Inc. (NASDAQ: SNPS) and Cadence Design Systems, Inc. (NASDAQ: CDNS) with market shares of approximately 40% and 30%, respectively, in the EDA software space. Below is a closer look at these companies:

Synopsys: +69.5% YTD 

  • Market Capitalization: $81.3B;
  • Forward PE Ratio: 48.2 (HIGH – 116% above the sector mean of 22.3);
  • Forward PSR: 14.0 (EXTREMELY HIGH – 445% above the sector mean of 2.6);
  • Forward PEG Ratio: 2.7 (SLIGHTLY HIGH – 50% above the sector mean of 1.8);
  • EV/EBITDA Ratio: 36.9 (HIGH – 159% above the sector mean of 14.3)

Cadence Design Systems: +69.3% YTD

    • Market Capitalization: $73.0B;
    • Forward PE Ratio: 52.5 (HIGH – 135% above the sector mean of 22.3);
    • Forward PSR: 17.9 (EXTREMELY HIGH – 597% above the sector mean of 2.6);
    • Forward PEG Ratio: 2.9 (SLIGHTLY HIGH – 61% above the sector mean of 1.8);
    • EV/EBITDA Ratio: 39.7 (HIGH – 178% above the sector mean of 14.3)

Understanding Valuation Metrics

To evaluate these companies, investors often look at several key ratios:

  • The price-to-earnings ratio (P/E ratio) compares a company’s share price to its earnings per share, providing a measure of relative value. A high P/E ratio could mean that a company’s stock is overvalued, or that investors are expecting high growth rates in the future.
  • The price-to-sales ratio (PSR) indicates the price paid for a share relative to the revenue that share generates, helping assess if a stock is valued appropriately. The mean forward PSR for the EDA Software Sector is 2.5 and is considered excellent when the value falls below two (2).
  • The price/earnings to growth ratio (PEG ratio) ratio takes into account a stock’s P/E ratio and the company’s expected earnings growth, offering a more nuanced view of value. A PEG lower than 1.0 is best indicating that the stock is undervalued.
  • The Enterprise Value-to-Earnings Before Interest, Taxes, Depreciation, and Amortization ratio (EV/EBITDA) ratio considers a company’s total value, including debt and equity, relative to its earnings before interest, taxes, depreciation, and amortization, giving investors insight into profitability across companies. A high means the company is overvalued, while a low ratio indicates it’s undervalued.

These metrics are essential for investors to understand the financial health and potential of companies within the EDA software sector.