To The Moon

$NVIDIA Corp(NVDA)$ GTC conference kicked off yesterday, and AI Godfather Jen-Hsun Huang delivered a keynote speech titled "Don't Miss This Transformative Moment in AI."

Given the productivity revolution brought by AI over the past year and the performance of concept stocks like Nvidia, Huang's speech has become a hotly anticipated event for the global capital market.

At the conference, Nvidia officially unveiled the most powerful GPU on the planet - Blackwell. With 208 billion transistors and AI performance of 20 petaflops, it blows H100's 4 petaflops out of the water!

Despite Blackwell's considerable blowout, Nvidia shares fell nearly 2% after hours.

During his speech, Huang mentioned several partners, including OpenAI, $Amazon.com(AMZN)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Microsoft(MSFT)$ $Meta Platforms, Inc.(META)$ $Dell Technologies Inc.(DELL)$ $Oracle(ORCL)$ and two other companies that might not ring a bell for everyone - $Synopsys(SNPS)$ and $Cadence Design(CDNS)$ . But these two stocks rallied more than 2% after hours.

They might not be the flashiest players in the AI game, but in the long run, these two companies are absolute beasts!

So, what do they do?

EDA!

Synopsys is the king of EDA, with Cadence right behind it.

What is EDA?

EDA stands for Electronic Design Automation, the fundamental tool for chip design, known as the "mother of chips". Using EDA tools, electronic engineers can automate processes like chip circuit design, performance analysis, and layout publication.

The EDA industry has a high technical threshold and is severely oligopolistic, making it the crown jewel of the entire semiconductor industry!

At GTC, Huang introduced that Synopsys is applying Nvidia's accelerated computing architecture, including the Nvidia GH200 Grace Hopper Superchip, to achieve up to 15 times faster estimated runtime gains across the entire EDA stack, encompassing design, verification, simulation, and manufacturing.

Huang said, "Our collaboration with Synopsys in generative AI and digital twins is crucial for the future design, automation, and manufacturing of chips."

Moreover, Synopsys and $Taiwan Semiconductor Manufacturing(TSM)$ will use the Nvidia cuLitho computational lithography platform for production, accelerating manufacturing and pushing the physical limits of next-generation advanced semiconductor chips.

Looking at their financials, Synopsys raked in $5.84 billion in revenue for fiscal 2023, significantly higher than Cadence's $4.09 billion. But in terms of growth, the two companies are neck and neck. Synopsys has a compound growth rate of 13.4% over the past five years, while Cadence boasts 13.9%.

By profitability, Cadence's gross margin is a whopping 89.4%, while Synopsys's is 79.1%. Adjusted net profit margins are also close, with Cadence at 25.3% and Synopsys at 22.2%.

Both companies prioritize research and development, with expense ratios consistently above 30%.

Their heavy investment in R&D is not only the source of Synopsys and Cadence's technological supremacy, but also a barrier to new competitors. Coupled with strong customer stickiness, new players will find it difficult to pose a threat to these two giants.

Despite their excellent financials, Synopsys and Cadence have high P/E ratios, with Cadence at 80x and Synopsys at 61x.

Such high valuations will require significant growth to justify, but according to Synopsys' earnings guidance, its revenue growth for fiscal 2024 is expected to be around 13%. Considering an increase in profitability, net income growth will be higher than revenue, but still around 20%. Matching this with a 61x valuation, it's hard to see much upside potential.

Investors might want to wait for a correction before getting on!