Introduction

There are only 3 companies trading on a U.S. stock exchange that are exclusively (i.e. are pure-play) involved in the custom design of complex semiconductor chips using sophisticated electronic design automation (EDA) software and one of them, Synopsis (SNPS), collapsed by 29% last week and is now down 12% YTD.

What is Electronic Design Automation (EDA) Software?  

Electronic Design Automation (EDA) software is a collection of instruments that address different aspects of the chip design process such as: 

• simulation software that predicts circuit behavior,
• design solutions that help create the physical circuit elements, and
• verification systems that ensure the design is correct and manufacturable.

The above processes enable engineers, along with designers, to create advanced semiconductor chips and electronic components with enhanced accuracy and minimal expenditures of time. 

What is a Semiconductor?

Anyone who has read any of my earlier articles on AI hardware stocks is familiar with just what semiconductors actually are but for first-time readers below is a short description:

• A semiconductor (aka computer chip or wafer) is a material that has an electrical conductivity value falling between that of a conductor, such as copper, and an insulator, such as glass.
• In many cases their conducting properties are altered by introducing impurities (doping) in to the crystal structure and when two differently doped regions exist in the same crystal, a semiconductor junction is created.
• Connecting the two materials causes creation of a depletion region near the boundary, as the free electrons fill the available holes, which, in turn, allows electric current to pass through the junction only in one direction. and is the basis of diodes, transistors, and most modern electronics. 

Which EDA Companies Dominate the Market?

1. Synopsys (SNPS): 35% market share
2. Cadence Design Systems (CDNS): 33% market share
3. Siemens EDA (Mentor Graphics): estimated 22% market share. It operates as an entity within Siemens Aktiengesellschaft so no specific financial information is available on Siemens EDA and, as such, is not included in our Pure-Play Custom Design (EDA) Software Stocks Portfolio (see below) 
4. Zuken, Aldec, Empyrean Technology, Silvaco and MunEDA make up the remaining 10% of the pure-play EDA market of which only Silcaco trades on a U.S. stock exchange but is not included in our Pure-Play Custom Design (EDA) Software Stocks Portfolio because of its extremely small market capitalization. 

Why Were Synopsys Shares Down w/e Sept 12th?

As mentioned above, Synopsys (SNPS) shares were down drastically week-ending Sept.12th driven by a mix of:

1. Disappointing Q3 results missing analysts' consensus EPS expectation by 40% 
2. Disappointing EPS Q4 guidance falling well short of analysts' consensus driven by weakness in its Design IP segment 
3. Significant problems at a key foundry partner
4. Securities‐fraud investigations by two law firms related to the Q3 disclosure
5. Analyst price‐target cuts and downgrades
6. Insider selling by CFO Shelagh Glaser in early September, potentially signaling reduced confidence among insiders

How Did Synopsys' Stock Perform Relative To Its Pure-Play Peers w/e Sept. 12th and MTD? 

1. Synopsys : DOWN 28.9% w/e Sept. 12th; DOWN 29.5% MTD
2. Cadence: Down 2.1% w/e Sept. 12th; DOWN 2.0% MTD

Portfolio Performance Chart

The above portfolio chart has been generated using the tools provided by PortfoliosLab.com and easy step-by-step instructions are available here to help you create a chart of your own portfolio or that of a client. It's easy, fast and free.

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