Wall Street giant Citigroup has initiated coverage on two leading EDA software providers, Synopsys (SNPS.US) and Cadence Design Systems (CDNS.US), assigning both a "Buy" rating with 12-month price targets. Citi analysts project these EDA leaders will emerge as primary beneficiaries of the upcoming AI investment surge.
The investment thesis centers on EDA software's critical role in AI chip development amid unprecedented global demand. As AI-assisted design tools gain adoption, chipmakers report significantly faster design cycles and improved efficiency. This trend coincides with a tech stock rebound, driven by Fed dovishness and strong earnings from AI leaders like Nvidia. On Monday, Synopsys shares surged over 4% while Cadence gained 1%.
Despite underperforming the Philadelphia Semiconductor Index (-22% for Synopsys, -5% for Cadence over six months) due to geopolitical risks and AI bubble concerns, Citi sees valuation reset creating upside potential. The firms collectively control 70% of the EDA market, demonstrating resilient 15-20% revenue growth even during industry downturns.
Dubbed the "mother of chips," EDA software has become indispensable as tech giants like Nvidia, AMD, and cloud providers accelerate complex AI chip development. Foundries including TSMC extensively use Synopsys tools for advanced nodes (5nm to 2nm), optimizing power-performance-area metrics. Both companies have embedded AI throughout their EDA ecosystems, with Synopsys' Synopsys.ai platform and Cadence's JedAI system enhancing design productivity.
Citi set price targets of $580 for Synopsys (currently $404.63) and $385 for Cadence ($304.47), citing: 1) EDA's transition from semiconductor enabler to AI infrastructure backbone, 2) sustainable double-digit revenue growth with 40%+ operating margins, and 3) valuation discounts to historical averages. Analysts particularly favor Synopsys, anticipating its IP business mix improvement will narrow the profitability gap with Cadence to 4-6% by 2026 from current 7-9%.
The EDA sector has garnered bullish consensus across Wall Street, with Goldman Sachs setting even higher targets ($600 for Synopsys, $410 for Cadence), positioning EDA as the next growth phase after AI processors and advanced packaging.