Stock Split Watch: Two artificial intelligence (AI) stocks that look ready to split

With the booming adoption of artificial intelligence, many key semiconductor companies have seen their stock prices rise, with several announcing stock splits this year.

But there are two critical companies in the semiconductor manufacturing landscape that may fly under the radar of many investors. This duopoly controls the software platforms that nearly all chip companies use to design and test their semiconductors.

After performing well in recent years, these two stocks have also seen their share prices rise to the point where a stock split may be on the horizon.

Synopsys and Cadence Design Systems: Using AI to make AI

Synopsis (SNPS 0.21%) and Cadence design systems (CDNS -0.28%) are the two leaders in electronic design automation software, each with about 35% of the EDA market, with the rest occupied by smaller point solution players. With such a concentrated market, virtually all major chip manufacturers use one or both of these companies’ tools to design, prototype, and test chip designs. In addition, both Synopsys and Cadence also sell semiconductor IP design blocks, which are standardized portions of chips that they also license to chip designers.

Both companies have strong tailwinds that have led to accelerating revenue growth over the past decade.

SNPS revenue data (year-over-year growth) by YCharts

It’s usually more difficult for companies to increase their growth rates as they get bigger because of the law of large numbers. But Synopsys and Cadence benefit from big secular tailwinds. These include:

• More semiconductors are going into more devices than ever before, and the amount of chip content per device is only increasing. The AI ​​revolution is only accelerating this trend.
• More companies are developing chips than ever before. Cloud hyperscalers are now designing their own custom designs in addition to traditional chip makers.
• Major chipmakers continue to develop more chips for more markets. Think about Qualcommtraditionally focused on the phone market, is coming out with its first PC processor this year.
• Chip fabrication designs have become more complicated at the top nodes, increasing the need for new architectures such as chiplets, back-end power, and gate-all-around transistors.

Increased complexity is also good for these two stocks, as they can help chipmakers accelerate and test complex projects with their collective expertise. Both Synopsys and Cadence are now using more artificial intelligence within their software platforms to help customers design and manufacture new chips. One can think of this as “AI helps chipmakers make better AI chips,” leading to a virtuous circle of sorts as the AI ​​wars heat up in earnest.

Image source: Getty Images.

Synopsys and Cadence had outstanding runs

As you can see, Synopsys and Cadence have each handily outperformed not only the S&P 500, but also the Nasdaq 100 over the past five years. Given the secular headwinds just discussed and their accelerating earnings, this is not surprising.

Nor is it surprising that Synopisis has seen its stock price appreciate to $506 per share and Cadence levitate to $273 per share at the time of writing. While these might not drive the 10-for-1 stock split, we’ve seen other AI-centric chip stocks execute this year, those share prices are high enough for perhaps a 5-for-1 or 2-for-1 split soon. or something in between.

SNPS data by YCharts

Are these stocks too expensive to buy today?

Synopsys and Cadence were never “cheap” in the sense that each had a high P/E multiple, due to each company’s recurring software revenue and their strong oligopoly position in the growing semiconductor industry. However, their valuations rose to 71 times earnings for Cadence and 53 times for Synopsys.

SNPS PE report data by YCharts

It seems quite expensive, but some Wall Street analysts believe that these prices are justified given the growth track of each company. This is especially true as each has recently experienced a pullback, with Cadence down 15% and Synopsys down 18% from their respective highs.

In August, Baird analyst Joe Vruwink upgraded Synopsys, with a price target of $663. Justifying the move, Vruwink said he believes Synopsys can maintain at least a high-teens growth rate in the coming years, which would also allow for significant margin expansion. This is more bullish than the consensus, which seems to assume only a high single-digit or low-digit growth rate pending.

Some investors have become skeptical about the sustainability of the chip industry’s recent run. However, investors always tend to fear the next downturn in the economically sensitive chip industry. However, shrinking, the semiconductor sector has actually been the market’s best performer over the past 10 years.

Synopsys and Cadence are composed for the long term

Looking long term for these two stocks, we need to ask ourselves just a few important questions. Do you think artificial intelligence will lead to a massive increase in chips, not only in data centers, but also in high-end devices like PCs, smartphones and cars? Are these chips getting more complex? And will more companies, start-ups and mature tech firms alike start designing custom chips?

If the answer to all of these questions is yes, these two well-positioned stock split candidates are still long-term buys in any market or sector pullback.