Two of the biggest players in the electronics design automation segment of the semiconductor industry are Cadence Design (CDNS 1.92%) and Synopsys (SNPS 2.56%). In this video clip from the "Semiconductor Revolution" show on Motley Fool Live, recorded on May 19, Fool.com contributor Nick Rossolillo outlines several metrics that make them high-performing stocks.
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Nicholas Rossolillo: Two companies that I'm going to highlight here very briefly, Cadence Design and Synopsys. These are the two heavy hitters in this space. You can think of them essentially like Autodesk of the semiconductor industry. These are software companies that help semiconductor firms design and test their chips. They help with integration of chips into a larger computing unit that help with actual software system verification like to make sure the chip is running the software properly. All sorts of cool stuff.
Because it's software, again the nitpicky thing with the semiconductor industry is that it's cyclical. That these are like subscription software businesses, so you get the nice steady increase in revenue from a software business, but they service the semiconductor industry.
These are two really interesting stocks if you're looking for a bet on chips but you don't want to play that cyclical game where, one year you're having booming sales, and then maybe the next, you flatline or have a decline in sales. That can be a roller coaster for some of these chip companies, but that's not really going to happen with these two.
Just some quick highlights. You can see both of them very very high gross profit margins. Lots of free cash flow in the last couple of years. Again a software, each incremental sale that they make, most of that money just goes directly to the bottom line, super-efficient operating model. Both of them have lots of cash.
Synopsys I haven't finished doing a complete update because they actually just reported on earnings the other day. I thought it was a little bit unfair maybe to compare Synopsys, with an extra quarter of results compared to Cadence Design over the last couple of years. But the long and the short here is both of these companies are, I think fantastic.
I don't know that you necessarily need to pick one or the other, I think Cadence Design is a popular pick around the Fool. I know I've covered it on a handful of times. But you you're going to get very similar results from both of these stocks, I believe. So you can buy both of them or just pick one if you want more stable business performance from the chip industry.
