05 Jun Cadence Design Systems

Most investors don’t know Cadence Design Systems (CDNS). It makes the software that the semiconductor firms use to design processors.

Investing in Cadence is a bit like selling shovels to miners. The semiconductor chip makers can’t make their chips without this software, similar to miners can’t mine without a shovel.

What is important about this sector right now is that semiconductors are going through a giant upgrade cycle.

Back to Cadence. The company began three decades ago when Solomon Design Automation and Ecad Inc merged. The combination created the world’s largest electronic design automation company. It also created a new wave of processor innovation. That led to automation and ultimately lower prices for goods.

Now the second wave is underway. The advent of cloud and edge computing means devices that used to be dumb are getting smart and connected.

For example, think about your phone. It used to just make phone calls and texts. Today I helped my mum set up her new phone. Except I didn’t. All I did was hold her old phone near her new phone and it did it all itself. That is smart. That is a smart phone.

Cadence is helping all these companies make things smart. They help the designers design.

A big part of Cadence success comes down to their CEO, Lip-Bu Tan. He sits on 69 boards as a director and in 2019 helped Cadence cement relationships with Samsung, the world’s largest semiconductor company, and Taiwan Semiconductor (TSM), the biggest processor manufacturer, named Cadence as partner-of-the-year for the fourth time.

Relationship Science, a Silicon Valley analytics firm, in 2017 named Tan the most connected person in the entire sector.

Cadence is now working directly with more than 50 companies building chipsets for cloud computing. The race is to smaller designs and new AI architectures. Last quarter, Tan announced new design wins with MediaTek and Mellanox who sought out Cadence for their strong record of reliability and extensive intellectual property portfolio.

Since 2004, when Tan arrived at Cadence, the company has made 27 acquisitions and the IP from these companies means Cadence is the go-to for all things new in the industry.

Cadence has been on a tear recently. The stock trades around 30x forward earnings, which even for a semiconductor is high. But keep in mind that gross margins are 88% and return on equity is 55%. These kind of numbers make fund managers very excited and money is flowing into the company.

I would like to say to buy Cadence Design Systems (CNDS) on a pullback, but with something this good……just buy it.