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Semi Software Poised for Profit
By Chris Kraeuter
TheStreet.com Staff Reporter
2/9/2005 6:59 AM EST
http://www.thestreet.com/tech/chriskraeuter/10208043.html
Chip investors like to be early to a party.
There's no "fashionably late" in a space where investors want stocks up to a year before a revival of fundamentals.
This brings us to the electronic design automation market and its weak performance of recent years. A technology transition will get under way next year and with it the possibility of its growth exceeding that of the overall semiconductor industry.
As semiconductors continue to get smaller and more complex, EDA software is expected to become more critical to successful high-volume chip construction.
Though semiconductor manufacturers are the prime buyers of EDA software, they haven't been utilizing the software in amounts that are pleasing investors. In 2004, when semiconductor sales increased almost 30%, sales of EDA software rose less than 5%.
Also, initial targets for 2005 don't show much more promise for the principal EDA players, such as Synopsys (SNPS:Nasdaq - news - research), Cadence Design Systems (CDN:NYSE - news - research), Mentor Graphics (MENT:Nasdaq - news - research) and Magma Design Automation (LAVA:Nasdaq - news - research).
A year from now, though, the environment should improve for the industry. That's when semiconductor manufacturers are slated to start designing chips with transistors spaced 65 nanometers apart.
Most chips today are manufactured with transistors spaced 130 nanometers apart, with the most advanced chips made at 90 nanometers. A human hair is about 50 nanometers in diameter. The closer the transistors are on a chip, the faster and more efficiently a chip can operate. The complexity also increases, however, as more and more transistors are crowded onto a processor.
"Right now, most of what we see is still largely experimental work," said EDA analyst Garo Toomajanian with RBC Capital Markets. "No one is doing production-ready work at 65 nanometers, but when we see that happen, that will be a good sign that things are about to pick up."
Likewise, portfolio manager Reed Bender of Robert Bender & Assoc. in Pasadena, Calif., said he's sitting on his Synopsys position for now in anticipation of better times ahead. He typically holds on to his stocks for three to five years.
"It's not a name we're actively adding to, but if things start to pick up, or if there's a perception that [things are picking up] , then we would add to our position," Bender said.
Follow the Leaders
Much of the decision to enter these stocks depends on when you think these technology transitions will occur. The official industry target is for production of 65-nanometer chips in 2007, but late 2006 is also a possibility.
Intel (INTC:Nasdaq - news - research), Samsung and Texas Instruments (TXN:NYSE - news - research) are the most likely candidates to start volume production of 65-nanometer chips in 2006. Intel announced this week that it has started running 65-nanometer chips in its factories -- the first indication that chip design is starting to shift from the research room to the clean room.
For EDA investors, the earliest indications of accelerating demand will come from design wins. Until then, don't expect much to happen, said Toomajanian. "In the near term, things are not that exciting," he said.
In the meantime, the EDA players are doing what they can to improve their businesses. Cadence Chief Financial Officer Bill Porter said his company wants to improve the pricing it gets for its software by better demonstrating its advantages. "We are very valuable for what we do in the supply chain, but we haven't done a good enough job demonstrating our value and monetizing that value," he said, referring not just to Cadence but to the entire EDA industry.
He's also preaching the inevitability that EDA software will become an indispensable aspect of semiconductor design and manufacturing as chips become smaller.
"Things are picking up at 90 nanometers, and there is plenty of opportunity for us to add value because it's so difficult and costly for customers that need to do very complex designs," Porter said, adding that the best is yet to come. "At 65 nanometers, we really get the connection with manufacturing, where the process between manufacturing and design really has to become integrated."
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