by Jon Markman | March 2, 2012 5:30 am
If you are a believer in intelligent design, you are a candidate to own Synopsys (NASDAQ:SNPS), a leader in electronic design automation, or EDA, software.
I know that doesn’t mean a whole lot to most of you, so let’s discover what this $4 billion market cap technology firm out of California actually does.
The firm began in 1986 as a startup founded by Dr. Aart J. de Geus, who still is chief executive. It started off as Optimal Solutions, producing only one product — a synthesis technology that originally was developed by General Electric (NYSE:GE).
The company now offers a full range of products that help semiconductor, manufacturing, computer, communications and consumer electronics companies improve the performance and productivity of their silicon-based products.
Any firm that uses silicon in their products needs to be able to effectively test them in a controlled environment. Synopsys provides complete front-to-back design and testing environments.
The majority of Synopsys’ clients are engaged in the manufacture of semiconductor chips for everyday items like mobile phones, laptops, automotive electronic systems and TVs. Since the life cycle of most electronic devices is very short, microchip suppliers are under constant pressure to get the latest and greatest chips out to their customers as quickly as possible.
Click to Enlarge This is how a typical process would work: A firm like Apple (NASDAQ:AAPL) has its engineers working on the next model of its respective phone, but to stay ahead of the competition, it needs it to be lighter and faster, and with more battery life. The firms lean heavily on specialty chip producers like Samsung (PINK:SSNLF) of South Korea to meet demand. For chip producers to remain relevant and keep their customer base, they in turn spend billions on R&D annually.
That’s where EDA firms like Synopsys come into play. They supply companies like Samsung with the software, intellectual property and services needed in the design, verification and manufacturing of their proprietary products. Synopsys specializes in power and yield management, system-to-silicon verification and time-testing results.
So what sets Synopsys apart from any other EDA firm in the industry?
Well, it is the clear industry leader, with 50% more revenue than the next-largest EDA competitor, while being the most profitable firm in the industry.
The company now has more than 60 sales, support and R&D offices worldwide, including the U.S., Europe, Japan, Israel, Chile and Armenia. But more importantly, of the top 50 semiconductor companies in the world, 49 are Synopsys customers. Its ability to provide service everywhere in the world at once and its aggressive acquisition philosophy have built its reputation.
It is the supplier to two of the fastest-growing technology platforms in the marketplace: mobile computing and cloud-based storage. Of the top 50 EDA spenders, 36 are focused on the mobile market, and five are primarily cloud technology companies — and in both sectors, Synopsys is the largest supplier.
SNPS has grown revenues nine out of the past 10 years — despite the recent economic slowdown — and has a business model that provides a consistent and reliable revenue stream.
Because of the constant upgrades demanded in the chipset business, where faster and smaller are the only things that matter, semiconductor firms must continually invest in R&D to drive growth.
As such, Synopsys typically enters each year contracted with more than 90% of its revenues already in place. This steady license model protects it from drastic, short-term movements in revenues, but still keeps it open to contracting new business.
Additionally, its business is very sticky, as high switching costs and product differentiation make it very difficult for a large customer to completely switch to another EDA firm.
The company has been in good hands since its initial inception, as founder de Geus has held nearly every executive position over the years before becoming chairman and CEO in 1988. He’s well respected in the EDA industry and has led the company through dozens of acquisitions and technology shifts.
Despite a flurry of acquisitions — six in the past two years alone — the company is in excellent financial shape, with no debt and more than $1 billion in cash on hand. Very impressive.
Shares are up 12.9% this year, but are trading at just 13.7 times next year’s earnings — well below their 19.8 five-year average. That is very cheap for a company of this quality. There still is plenty room to run, so design SNPS into your plans.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and a long-term investment service, Strategic Advantage. Check out his Top Stock for 2012 here.
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