Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Looking for exposure to the booming semi-conductor sector?
Not a day goes by that we don’t hear about the massive semiconductor shortage created by the pandemic. Supply chains around the world which span Europe, Asia the US and most importantly Taiwan are struggling to come to terms with a massive surge in demand for computer chips at a time when the ramp up in production is difficult to say the least.
The likes of NVIDIA, ASML and Taiwan Semiconductor Manufacturing Co are now commonplace within both emerging market and developed market portfolios after being considered too cyclical just a few short years ago. So much so the trade has become increasingly crowded. On basic historical measures, NVIDIA trades on a P/E of over 80 times and ASML 60 times.
These manufacturers and foundries clearly have an important role to play, however, one of the most successful investment strategies in recent years has been to find the ‘picks and shovels’ that support these booming markets. This isn’t quite as straightforward in technology as it is in traditional mining, but one undiscovered gem in the semiconductor sector appears to be Synopsys.
Listed on the Nasdaq, Synopsys (NYSE:SNPS) was founded in 1986 ion North Carolina with a charter to develop and market synthesis technology developed by the behemoth General Electric. Synthesis technology refers to the software and hardware required to combine and test new technology, finding faults and improving its potential use cases.
According to the team managing Franklin Templeton’s Global Growth strategy, ‘everything is getting “smarter” and more connected” whether that is consumer products, cloud computing or motor vehicles. The key technology ‘underpinning these long-term trends are increasingly complex semiconductors and more sophisticated technology’.
Synopsys, they suggest, is central to both of these incredible growth sectors ultimately ‘enabling this innovation’. The company supplies products and services to help chip makers to continue innovating focusing on three related and less cyclical markets. these are:
- Electronic design automation (EDA);
- Semiconductor intellectual property; and
- Software security and property.
According to Franklin, ‘EDA uses software to design and test both digital and analog semiconductors’ and is a technology that the manufacturers themselves rely upon. The market is ultimately tied to the level of research and development investment in the sector, which is substantial as every player seeks to maintain their competitive edge. This is said to represent a US$7.3 billion market of which Synopsys is the market leader.
On the topic of intellectual property, the managers highlight that ‘greater chip complexity and the expanding universe of smart devices has pushed companies to outsource more the building blocks used for chip designs’. That is, semiconductor manufacturing companies are sharing their core intellectual property and designs with the likes of Synopsys in an effort to focus on seeking opportunities to improve them and remain at the cutting edge.
Of particular interest in recent years, however, has been the companies expansion into the ‘software integrity’ market which involves the testing of chips, software programs and applications using their complex systems and computing power. These systems aim to ‘help software engineers find and fix quality defects and security issues’ ultimately allowing the designers to create more efficient and valuable products for their end consumers. This is a rapidly growing market according to Franklin, with everyone from banks, software companies and healthcare firms to aerospace and defense companies looking for help to secure their programs.
By no means is the company cheap, trading on a P/E of around 49 times with a market cap of US$50 billion. However, compared to the better-known names many see this as a discount given the growth opportunity on offer. Franklin see the stock as being ‘less cyclical than the broader semiconductor industry’ with more than 90% of sales coming from recurring subscriptions.
