Cadence, Synopsys see bullish views at Needham on agentic AI boosting EDA license growth

Needham reiterated its Buy ratings on Cadence Design Systems (CDNS) and Synopsys (SNPS), reaffirming its positive view on its thesis of agentic AI-driven Electronic Design Automation, or EDA, reacceleration.

Shares of Cadence surged about 4%, while Synopsys rose around 2% on Monday. Cadence has been on a seven-session losing streak while Synopsys has closed in the red in the past six trading days.

Analysts led by Charles Shi said that the number one EDA bear case has been the AI disruption risk; despite that, EDA companies have repeatedly pushed back and, to the contrary, indicated that they are AI beneficiaries, more so since the emergence of agentic AI that is expected to reignite license growth.

However, the analysts noted that bears have become louder recently, especially since the launch of Kimi K3 by Moonshot, which showed certain capability in automated chip design by using large language models, or LLMs.

On Friday, Alibaba (BABA)-backed Chinese AI startup Moonshot debuted Kimi K3, a 2.8 trillion-parameter system it claims is the world's largest open-weight AI model, delivering performance that closely rivals Anthropic's (ANTHRO) frontier Fable model.

Cadence's stock had tumbled nearly 9%, while Synopsys slumped about 8% on Friday. 

The analysts provided counterarguments to the AI disruption bear case and think that the concerns are overblown.

"At a high level, we think the use of LLM is likely limited to RTL [Register Transfer Level] coding, which does not affect the largest EDA tool categories such as synthesis, place and-route, and physical verification. We believe agentic AI, which complements rather than disrupts EDA, has the real potential to boost EDA license growth. We also provide what we hear from experts in the field about what they actually think of "AI-native" EDA, which we conclude is still far away from having much real-world impact. In the stock market, we observe those bearish narratives around AI risks have created significant mispricing in EDA stocks," said Shi and his team.

The analysts added that they "encourage investors to take advantage of the mispricing" and reaffirmed their "positive view on our thesis of agentic AI driven EDA reacceleration" and reiterated their Buy ratings on Cadence and Synopsys.

Last week, analysts at BNP Paribas said that they think the sell-off in Cadence and Synopsys was unwarranted and would "buy on the weakness."