This US stock counts the world’s biggest companies among its clients – it will only go bankrupt if they do
He adds that of the two main players, he prefers Cadence. “Together they have a huge market share – most of the big chip designers use both because they specialize in slightly different things,” he says. “Synopsys is stronger in digital chips, Cadence in analog.
“Analog chips are harder to make even though digital sounds cooler – analog chips are what allow computers to interact with the real world, so they’re increasingly important as we embrace automation and the Internet of Things, but while a digital circuit only deals with ones and zeros, an analog has to handle a whole variety of inputs, making design and manufacturing more difficult.
The shares have fallen a relatively modest 18% since their peak last year. Even now, they’re not exactly cheap at 36 times expected earnings for this year, “but they’re never cheap,” de Gale says. “They are up 348% in the five years to the end of last month versus 112% for a broad tech index. Part of that gain is an increase in valuation, but it’s mostly earnings growth.
Nor should a company that achieves margins of 23.3% and a return on capital of 23.1% be expected to be particularly cheap, especially since the annual growth in profits between 2019 and 2023 is estimated at 20.2%. Questor has encountered few companies with stronger or longer lasting barriers to competition. To buy.
Questor says: buy
Symbol: Nasdaq: CDNS
Share price at 5:45 p.m.: $157
Update: Lam Research
This chip-making equipment maker, reported here in December after a conversation with de Gale, has also fallen victim to tech selling; its shares fell 42%. But they remain one of the top five holdings in his fund and have similar long-term strengths. Keep buying.
Questor says: buy
Symbol: Nasdaq: LRCX
Share price at 5:45 p.m.: $409.64
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