EDA in the Age of AI

Imagine you're back on the playground. There's always that one kid with all the best toys. Well, welcome to the playground of electronic design automation (EDA), where Synopsys and Cadence are the two kids who control all the most intricate chip-building tools. Synopsys is the kid who's always been the master of logic, showing up with the most high-tech and precisely engineered gadgets, while Cadence is the slick strategist who's pivoted to new games, getting some fancy engineering shoes on along the way.

But this playground is getting crowded, and the games are evolving—mostly because of AI. AI is like that huge, shiny toy everyone suddenly wants to play with, but it’s so complex it requires everyone else to adjust just to keep up.

1. Synopsys and Cadence: A Tale of Two Cultures

Synopsys and Cadence have been rivals for years, kind of like two opposite sides of the same coin. Synopsys was always the technical genius on the playground, with a deep love for PhDs, simulations, and a meticulously engineered approach to digital design tools. Picture a corporate boardroom full of engineers tweaking and optimizing their digital playground (okay, maybe not a literal playground, but you get the idea). Meanwhile, Cadence spent years with a sales-savvy approach, capturing mindshare through brilliant marketing until they slowly transitioned towards a more balanced engineering focus.

Their rivalry is almost like Coke versus Pepsi, but instead of soft drinks, it’s about IP blocks and analog chips. Imagine Synopsys holding court over $1.1 billion in IP sales compared to Arm’s $2.6 billion, while Cadence plays in a much smaller $250 million IP sandbox. They’re all building for AI—but it’s clear that Synopsys aims to own the digital side, while Cadence is cozying up to analog, kind of like the kid who picked a slightly less popular but still super cool game.

2. The AI Hype: What’s Really Going On?

Now, let’s talk about AI—because how can we not? AI is being pitched as the new magic wand, but here’s the thing: it’s not really that simple. Yes, AI drives complexity, and complexity drives demand for tools. But here’s the twist: the availability of new semiconductor technologies like 3nm FinFET and 2nm GAA is dragging along—and the number of super complex chips being designed isn’t as huge as you’d expect. In fact, Synopsys and Cadence benefit indirectly from AI. More complex AI chips do mean more need for EDA tools, but it’s not like EDA tools have to be customized for every single type of AI chip out there. It’s the same toolbox, just for a new breed of toys.

3. Why AI Doesn’t Mean EDA Explodes Overnight

There’s this vision of AI catapulting EDA into exponential growth, where AI would require more chips, and by extension, more EDA. Here’s where we hit reality. According to our expert, AI is adding demand, but not enough to double the EDA market overnight. We’re looking at growth rates potentially inching from 12% up to maybe 18% annually for a bit—impressive but not revolutionary.

And yes, Synopsys has had some success with software security—selling security tools to check vulnerabilities. But as the former CTO himself put it, it’s a completely different business from chip design tools. Imagine Synopsys’ EDA group as a builder working on a cathedral, while the software integrity team is like a night watchman ensuring no one sneaks in through the unfinished doorways. Same building—totally different jobs.

4. What About Those Chips for Cars?

One area that’s looking interesting is chips for automotive applications. Think of it as a new twist in the game—now, chips need to handle super high temperatures, different driving conditions, and more. This is creating demand for specialized verification tools. It’s like the old days of NASA—you’re not just designing a rocket; you’re also making sure it works on the launchpad, in space, and when it’s coming back down to Earth.

But does this mean that EDA is suddenly going to conquer a whole new market? Not really. It’s more like they’re getting a side gig—something extra that adds a little more revenue but doesn’t fundamentally change the game.

5. Mergers, Acquisitions, and The Future of the EDA Market

If you’re an investor wondering where Synopsys could grow, here’s a clue—M&A. Our expert hinted at acquisitions in the software security space as one possible future for Synopsys. They’re like the kid who’s always looking for new toys to add to their collection—and the best way to do that quickly is to buy them. Look for potential mergers that could bring new capabilities—perhaps Ansys, which works not just in chip design but also mechanical and equipment analysis. That would be like merging your Lego set with the best toy car collection around—instantly giving you new ways to play and build.

6. Geopolitics, Chips, and the China Conundrum

Now, what about the broader semiconductor market and all those geopolitical tensions with China? Could the U.S. replicate what TSMC is doing if things go awry with Taiwan? Yes, technically it could—but at a cost that’s about three times higher. Picture building a perfect replica of the most advanced factory in the world, except now every single brick costs three times as much, and labor is twice as expensive.

The problem isn’t technological capability; it’s cost. And in the semiconductor industry, where margins can be razor thin, tripling your costs means you’re instantly out of the game.

Wrap-Up: Playing the Long Game

So where does this leave us? EDA is an industry that’s foundational, but not flashy. It grows when semiconductors grow, but it’s not going to suddenly quadruple because of AI. Synopsys and Cadence are the key players, competing in digital and analog niches, while Synopsys may also be picking up acquisitions to expand its software integrity presence. Think of them as those kids on the playground who’ve mastered their games—adding new toys here and there, but still very much in the same game.

For investors, this is an industry where you need to be comfortable playing the long game. It’s growing—not at rocket speed, but consistently. And in an industry where stability is often undervalued, that’s not a bad bet.