As AI went from short-term hype to an enduring trend, the world became aware of how important electronic design automation (EDA) software is in 2023. EDA is a type of computer-aided design suite specifically for chips and computing systems. To start 2024, industry leader Cadence Design Systems(NASDAQ: CDNS) is making an acquisition to double down on its most critical EDA-related services: custom silicon design.
The company being acquired is a small engineering team called Invecas, which will be added to Cadence's Silicon Solutions Group. Here's what investors need to know.
Does Invecas make Cadence stock a buy?
First, let's address the big question first: Is Cadence stock a buy right now? After an epic 70% increase in 2023, this stock isn't cheap. Shares trade for nearly 40 times the expected earnings per share in 2024 and about 45 times the expected 2024 free cash flow.
Invecas isn't going to do much to further boost those already high 2024 expectations. In the press release announcing the acquisition, Cadence said, "the terms of the transaction were not disclosed" (which almost always means the purchase was for a small sum of money) and that the addition of the Invecas engineering team will "be immaterial to Cadence's total revenue and earnings this year."
This is a drastically different strategy from the biggest EDA software company Synopsys, which is reportedly in advanced talks to acquire physics simulation and design software company Ansys. Synopsys currently has a market cap of $76 billion, and Ansys at nearly $31 billion, so this would be a megamerger if the rumors prove true.
For investors looking for value, Cadence and its newly acquired prize likely aren't going to cut it. But if long-term growth from AI and other advanced software needs is what you're looking for in an investment, read on.
Why Cadence's strategy is important
So why would Cadence ink such an immaterial deal, let alone make an announcement about it, when industry peers and heavyweights are making bolder moves?
Software applications, and especially AI (not just the ones made famous by ChatGPT maker OpenAI and Nvidia), are radically increasing the complexity of semiconductor design. Semiconductor technologies like 3D architectures (stacking different chip types atop each other to shrink overall size and improve performance) and chiplets (utilizing smaller chips for specific functions and connecting them using tiny networking features rather than a monolithic chip to handle all chip system functions) are needed to continue boosting software performance. Many companies utilizing advanced software -- automakers, healthcare providers, manufacturers -- need all the help they can get with custom chip design solutions.
Invecas has a track record of successful custom engineering work across many industries and already uses Cadence's design tools. Adding it to its list of services directly, Cadence plus Invecas can approach more non-semiconductor companies in need of custom silicon solutions to meet their product and software service needs.
Cadence has its own track record of successfully plugging in smaller peers like this into its own platform to stoke ever-increasing profitable growth over the years.
Data by YCharts.
Nevertheless, it's important to reiterate the high premium Cadence stock trades for right now. I like this EDA company's strategy, and it has established itself as an integral part of the AI and advanced software supply chain. But I continue to believe a dollar-cost-average purchase plan would be best for any investor looking to play the long game in Cadence Design Systems stock.
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Nicholas Rossolillo and his clients have positions in Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool has positions in and recommends Cadence Design Systems, Nvidia, and Synopsys. The Motley Fool recommends Ansys. The Motley Fool has a disclosure policy.
