2 Underperforming Semiconductor Stocks to Grab at a Discount This October

As artificial intelligence (AI) continues to gain massive traction across industries, the demand for semiconductor chips is also set to increase. With chips an essential piece of architecture for building various AI platforms, the global semiconductor market is poised to reach a staggering $2.06 trillion by 2032.

Investors looking to add exposure to this megatrend are likely well aware of the usual suspects from the AI chip industry, like Nvidia (NVDA), AMD (AMD), Broadcom (AVGO), or Taiwan Semiconductor (TSM). However, the universe of semiconductor stocks is vast, and contains a number of hidden gems that often go overlooked by the market.

Notably, investment firm Baird is bullish on two under-the-radar semiconductor stocks that are focused on the niche domain of EDA, or electronic design automation. As analyst Joe Vruwink wrote, "Historically, when chip stocks underperform on cycle concerns, [electronic design automation] attracts interest and sees outperformance against SOX of ~20% (median) to ~30% (average)." 

Likewise, Mizuho just initiated both stocks at “Outperform,” citing a “stable oligopoly” in the EDA market that creates “durable” revenue streams.

Although these stocks have underperformed the broader market in 2024, the EDA market is poised to reach $26.2 billion by 2028, making this an attractive investment opportunity in two companies that enjoy dominant positions in this space. Here's a closer look at these two essential players in the semiconductor supply chain.

#1. Cadence Design Systems Stock

Founded in 1981 and based out of San Jose, Cadence Design Systems (CDNS) is a leading provider of EDA software, hardware, and services. Their tools are used by engineers to design and verify complex integrated circuits, from microprocessors and memory chips to analog and mixed-signal components. The company's market cap currently stands at $68.5 billion.

CDNS stock is down 9% on a YTD basis.

Cadence reported solid numbers for the second quarter, with both revenue and earnings topping estimates. Revenues of $1.06 billion in the quarter represented growth of 8.6% from the prior year, while adjusted EPS ticked up by 4.9% to $1.28, outpacing the consensus estimate of $1.23. Notably, this marked the 15th consecutive quarterly earnings beat by CDNS.

The company had a solid backlog of orders worth $6 billion, providing further revenue visibility, and Cadence closed the quarter with a cash balance of $1.06 billion.

Over the past 10 years, Cadence grew revenue and earnings at impressive CAGRs of 10.74% and 23.06%, respectively. Looking ahead, analysts are expecting Cadence to report revenue and earnings growth of 13.87% and 17.10%, well above the sector medians of 6.26% and 7.23%, respectively.

Cadence’s workforce of 10,000 employees, primarily field and R&D engineers, operates across numerous global development centers. They provide essential services such as digital design, analog/custom design, debugging, verification, circuit board design, and multi-physics optimization. These solutions play a crucial role in advancing key megatrends like data science, machine learning, 5G, IoT, and AI, where Cadence holds a pivotal position.

In addition to its in-house expertise, Cadence has actively pursued targeted M&A activities to strengthen its offerings. Recent acquisitions from Rambus (RMBS) and CEVA (CEVA) have bolstered its service lineup, enhancing its capabilities in key technology areas.

Analysts are optimistic about CDNS stock, which has an average rating of “Moderate Buy” with a mean target price of $318.43, which indicates an upside potential of about 28.3% from current levels.

#2. Synopsys Stock

Based out of Mountain View, California, and founded in 1986, Synopsys (SNPS) is a global leader in EDA, semiconductor IP, and software security. It develops software tools for chip design, establishing itself as one of the major players in the EDA industry. The company's core products help semiconductor designers accelerate their work. The company currently commands a market cap of $76.97 billion.

In 2024, SNPS stock is down 4.6% so far.

Just like Cadence, Synopsys posted a solid set of numbers for most recent quarter, with both revenue and earnings topping estimates. Fiscal third-quarter revenues grew by 13% from the previous year to a record $1.53 billion, with the Upfront Products segment driving growth. 

Adjusted EPS rose by 27% to $3.43, coming in ahead of the consensus estimate of $3.28. This was the 16th consecutive quarter that SNPS beat Wall Street's bottom-line estimates. Synopsys  also increased its cash and equivalents balance to about $2 billion from $1.6 billion in the year-ago period. 

Over the past 10 years, Synopsys' revenues and earnings have clocked CAGRs of 12.35% and 19.45%, respectively. Looking forward, analysts are expecting the company to grow revenue and earnings at rates of 10.89% and 19.42%, well above the sector norm.

Notably, Synopsys plays a vital role in the semiconductor industry by serving major chipmakers like Nvidia, Intel (INTC), TSMC, and Samsung, providing critical tools that help firms test and verify chip designs before the costly process of manufacturing. This service is a key reason for Synopsys' financial success.

The company's moat is strengthened by the high switching costs associated with its software and vast IP library, which allows chipmakers to build components faster. Synopsys’ acquisition of engineering simulation leader Ansys is also expected to expand its influence, combining its EDA expertise with Ansys’ simulation and analysis tools.

Analysts have an average rating of “Strong Buy” for SNPS stock, with a mean target price of $649.64. This indicates an expected upside potential of about 32.4% from current levels. 

More Stock Market News from Barchart

• CMG Earnings Preview: What to Expect from Chipotle Mexican Grill in Q3
• These Dividend Aristocrats Could Be a Slam Dunk in 2025
• Don’t Day Trade, Says Warren Buffett, “The Main Thing to Do Is Buy Into a Wonderful Business and Just Sit There With It”
• What to Expect From DuPont de Nemours' Q3 2024 Earnings Report