Since my last entry on EDA, Synopsys has reported earnings, and the results was quite good. Compared with the cut-in-half crowd, i.e. CDNS, MENT, and PDFS, this should show that the problems for the cut-in-half crowd were mostly company related, not a dramatic change in the industry. There might be many structural problems for the EDA industry, but it does not just suddenly get worse and overwhelm all candidates in the industry. If that’s the case, Synopsys would not be able to escape it.
Almost all the cut-in-half companies had experienced the ‘cut-in-half’ phenomenon before, and so industry followers should not be too scared by this, and as long as there’s no sudden change to the entire industry (e.g. silicon has just been replaced by a new material, and all design methods have changed; or semiconductor companies suddenly form a new consortium, and vow not to buy software from EDA vendors anymore; or a new startup is on the horizon and will nullify the entire design methodology from front-end to back-end, and affect all the cut-in-half crowd, etc.), the companies could just be repeating their previous cycles.
The EDA industry has many problems, with the biggest problem in growth of the entire industry revenue base. However, this is an industry that won’t go away as semiconductor companies are not keen on setting up their own shops to replace the EDA vendors. Except for the FPGA vendors, it just does not make sense for most semiconductor companies to have an internal EDA group to design software so customers can use their chips. Even for FPGA vendors, they depend greatly on EDA companies to help them design their own chips.
For the cut-in-half crowd, the most interesting one to me is PDFS. In time of crisis, the best thing to look into is the balance sheet. In this case, PDFS has a strong balance sheet. Ignoring all else, and using only total current asset to account for its asset base, and subtracting all liabilities, PDFS has > $60 million. Assuming the absolute worst case that PDFS will not get any revenue (i.e., $0) in subsequent quarters, and assuming that it will spend the same amount as in last year, PDFS will still be able to survive for at least 1 more year. Basically, the amount is ~$2.25/share in (cash – liability), assuming no significant dilution in the future. Current share price is $4.81.
Another intrinsic value for PDFS is the DFM expertise it has. It’s always difficult to find good employees, no matter if you are looking for a design engineer, a nurse, or a maid. However, in the DFM space, even mediocre workers are hard to come by. There’s just not many people who has experience in semiconductor manufacturing yet wanted to work in the EDA industry. And while the DFM space has promised for quite some time that the time will come for great need for DFM but yet not there, it’s certainly closer to that point than a few years ago with 45mm fab now being built and operated. This pool of experienced employees are therefore of good value to large EDA vendors such as CDNS and SNPS, or to semiconductor equipment companies, or semiconductor manufacturing companies.
While it’s easier to establish a floor price for a stock, it’s much harder to say when is the best time to sell. That highly depends on how much risk one is willing to take, the overall environment at that time, and what one think is the fair value for a stock, and that’s different for different people of different personality and faith.
Some will argue that PDFS will go lower, or we can wait until the stock price comes down to the cash value of the stock, as it happened with Numerical Technologies before, and it’ll be better to buy at that time. That may very well be, but it does not have to be either. In hindsight, we will all be able to say what’s the best price of entry, but without knowing the future, it will only come down to whether one wants to take the risk or not. I am currently averaging down, but only time will tell if that’s a right decision.
