Just as the Philadelphia Semiconductor Index wrapped up an eight-session losing streak on Monday, the analyst team at Morgan Stanley stressed that the moment for buying the semiconductor sector on dips has arrived, and it has handed the AI computing trade theme another key AI investment angle: backed by recurring revenue fundamentals, the world's two largest EDA superpowers by market size, Synopsys (SNPS.US) and Cadence Design (CDNS.US), are poised to expand the EDA software market and open up stronger profit growth and valuation expansion through AI agent application products.
Separate data compiled by another Wall Street financial giant, JPMorgan, on October 19 showed that in the week ended October 16, global equity ETFs drew $46.3 billion in inflows, with the single product SOXL, a triple-leveraged bullish ETF tracking the Philadelphia Semiconductor Index under the U.S. ticker SOXL, setting a record weekly haul of $7.2 billion, while ETF products tracking South Korea pulled in a cumulative $1.3 billion, the strongest since July, with roughly $600 million of that flowing into the triple-long Korea ETF KORU. At the same time, DRAM-themed ETFs suffered an eighth straight week of redemptions, shedding $900 million in the latest week. These fund flows highlight that the market is actively betting on a semiconductor rebound, yet bullish confidence in the valuation and earnings expansion cycle for semiconductors, including the memory chip supply chain, has not been repaired in tandem, reflecting leveraged dip-buying coexisting with institutions reducing risk.
Against this backdrop, the Morgan Stanley analyst team emphasized that the two EDA giants, compared with other semiconductor names, offer a dual potential of earnings growth and valuation recovery. Equity market analysts at Morgan Stanley said in their research note that the next round of market re-rating and stronger rally for the two major EDA software giants urgently requires positive delivery along the path of "EDA AI agent adoption, large-scale commercialization, and earnings growth contribution." Morgan Stanley rates both EDA giants Overweight: it raised the price target on Synopsys to $574 from $500, and maintained $400 for Cadence Design. Relative to the October 16 closing prices of $454.63 and $319.51 cited in the report, the implied upside is 26.3% and 25.2%, respectively.
The EDA software market dominated by the two superpowers, Cadence Design and Synopsys, can be described as the "operating system, verification hub and manufacturing signoff infrastructure for chip design," and is the "first piece of infrastructure" for every advanced-process chip in the AI computing chain to move from concept to tape-out, which is why chip industry participants call it the "mother of chips." Without EDA, modern advanced chips could not rely on manual work to complete logic design, routing, timing, power, thermal, reliability and yield constraints at the level of tens of billions of transistors. Without validated PDKs, standard cell libraries, IP modules, simulators, formal verification and physical signoff tools, even the most ambitious chip design blueprint could not be reliably and mass-produced by a foundry.
Why EDA software benefits from the unprecedented AI agent frenzy
Since ChatGPT swept the world in 2023, the two EDA leaders, Synopsys and Cadence Design, have clearly embedded "AI application tools and AI agents" deeply across the entire flow of their EDA software ecosystems, and more recently have focused even more on a "full-stack AI plus EDA platform." For example, the Synopsys.ai suite covers AI-driven flows from system architecture to design, verification, testing and manufacturing. Agentic AI inference workloads focused on AI agents not only drive a sharp expansion in design demand for increasingly customized AI chips and increasingly complex semiconductor systems, but also broaden the usable space for EDA tools through automated design, verification and simulation, and usage-based charging is expected to convert new workloads into revenue and profit. Combined with the recurring revenue base of the traditional licensing business, Synopsys and Cadence Design therefore possess dual potential for earnings growth and valuation recovery.
On the technology development path of EDA chip design software, the emergence of AI agents has comprehensively expanded the space for design generation and iteration of chip design software, and has also reinforced the value of reliable verification systems. Agents can write register-transfer-level code, create tests and modify constraints, but the results must still pass simulation, formal verification, equivalence checking and physical signoff. Cadence has already enabled agents to call specialized engines such as Xcelium and Jasper to obtain feedback. It follows that the denser the design iterations, the greater the demand space for verification and optimization; the process adaptation, engineering algorithms and trusted results framework that EDA possesses become an important foundation for agents to complete engineering tasks.
In terms of the growth path, the large-scale penetration of AI applications into various industries is actively driving accelerated upgrades and iterative renewal of GPUs, custom AI ASIC chip systems, memory components, data center CPU systems and data center optical interconnect systems. Chip design agents built for EDA software, in turn, can significantly cut R&D time and costs, enabling the same budget to explore more architectures and versions. If new projects, tool coverage and paid usage grow in tandem, efficiency gains can translate into EDA market expansion. Therefore, the long-term opportunity jointly pointed to by Morgan Stanley's bullish notes on Synopsys and Cadence Design is this: more chips need designing, each design uses a broader set of tools, and new design activity can be charged for, allowing EDA chip design software to fully share in the strong profit space of AI from application expansion to hardware iteration.
What to buy after the Philadelphia Semiconductor Index starts rebounding? Attention should go to EDA, backed by both increasingly strong chip design demand and recurring revenue
It is worth noting that, compared with the vast majority of semiconductor sector names, the relative defensiveness of the two EDA chip design software giants, Synopsys and Cadence Design, is quite rare, mainly because they primarily serve chip research and development, so their revenue does not directly move with current-period chip shipments or memory spot prices. Multi-period contracts, recurring revenue and the continuity of R&D projects make revenue recognition smoother. Morgan Stanley judges that if semiconductors enter a downturn, the two companies are likely to outperform the other semiconductor companies it covers. Synopsys's application-optimized IP for hyperscale cloud providers will raise capital expenditure sensitivity, but the new model does not replace the original business. This in turn gives the EDA giants both resilience in existing revenue and incremental AI opportunities.
The most notable growth and change at Synopsys is first reflected in upward earnings revisions. Management raised its long-term EDA and design IP growth expectations to the mid-teens and high-teens, respectively. Morgan Stanley adopts 13%, 15% and 9% growth for EDA, IP and simulation in FY27, the 2027 fiscal year basis, and forecasts revenue of $10.896 billion and adjusted earnings per share of $19.12, the latter revised up about 6.5% from the previous estimate of $17.96, rising further to $23.14 in FY28, the 2028 fiscal year basis. IP recovery, Ansys synergies and Physical AI are the main drivers, and Morgan Stanley believes the December earnings report may narrow FY27 guidance toward the upper end. The $574 price target uses roughly 30 times FY27 earnings, still below the five-year historical average forward P/E of 36 times, reflecting the combined driver of earnings improvement and valuation recovery.
Turning agent calls into its own revenue: the incremental commercialization path for the EDA pair
Synopsys proposes three AI paths: Full Stack, customer-owned platforms and agents, and Frontier Models. The Morgan Stanley analyst team said that, from a commercial mechanism perspective, this expands the entry points through which professional EDA capabilities can enter different customer workflows, and usage-based charging is expected to capture incremental execution demand. Application-Optimised IP, or "Factory 2," increases the degree to which IP is combined with customer-specific application needs; Ansys-fused products extend the opportunity to system and multiphysics simulation. Morgan Stanley explicitly stated in the research report that these paths are still early, and the next re-rating needs to rely on positive beats against investor day targets, expanded customer collaborations, and evidence of each AI platform's contribution to earnings per share.
Cadence Design's advantage is its solid existing business and a broad agent portfolio. Morgan Stanley forecasts third-quarter revenue of $1.612 billion, adjusted earnings per share of $2.07 and backlog of $8.2 billion; fourth-quarter earnings per share of $2.10, about 3% above consensus. In the prior quarter, IP grew 40% and the hardware business set a record, while design-technology co-optimization support from Intel, Samsung and TSMC underpins EDA demand. ChipStack already has more than 20 customer collaborations, and together with ViraStack, InnoStack and AuraStack covers digital design verification, analog design, implementation signoff and PCB and advanced packaging; a more significant contribution is expected in 2027, and current guidance does not yet factor in a jump in agent adoption. Morgan Stanley expects the company to increasingly emphasize broad customer adoption and penetration growth rather than announcing a blockbuster AI partnership like Synopsys.
What both share as a stock catalyst is the ability for AI value to reach the income statement. The Morgan Stanley analyst team said that although Cadence Design posted record orders last quarter, its shares were basically flat the next day, so the October 26 earnings report needs to further explain the commercialization path. Morgan Stanley forecasts FY27, the 2027 fiscal year, revenue of about $7.366 billion, earnings per share of $9.82 and an adjusted operating margin of about 46.1%, with the $400 price target corresponding to about 41 times earnings; the analog and mixed-signal product lines, system analysis and customer relationship growth paths support its valuation premium. By contrast, Synopsys is cheaper, but Ansys synergies and execution of new businesses are more critical. The report gives bull-case scenarios of $1,000 and $600 for Synopsys and Cadence Design respectively, and bear cases of $200 for both, reflecting different scenarios such as accelerating growth and R&D contraction; the base targets remain $574 and $400.
Comments