Cadence

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Video transcript

Cadence is an American multinational technology and computational software company, headquartered in California. It is a leader in electronic systems design, what we call EDA. With more than 30 years of computational software expertise. The company's core business offers mission critical systems and tools required to design semiconductor chips.

The customers include some of the world's most innovative companies such as Nvidia, Apple and Alphabet, which owns a Google brand. We believe Cadence is in a leading position to benefit from the structural growth of the EDA market with the potential to reinvest into the more profitable and higher growth areas like Simulation.

We invested in December 2023 based on our view that Cadence would become a sustainable double-digit grower with increasing profitability. The electronic design automation market is essentially an oligopoly in which Cadence is a significant player with high barriers to entry and strong pricing power. It is set to benefit from the secular growth in the EDA market.

This is driven by many factors including the increased complexity of chip design, the limitations to Moore's Law of miniaturisation and incremental demand from systems companies who are increasingly prioritising chip design into their overall product roadmaps.  Moore's Law is the idea that computer chips become twice as powerful roughly every two years, making technology faster, smaller and cheaper over time. Semiconductors are the brains behind electronic devices from smartphones to computers and EDA plays a significant role in semiconductor design.

Essentially, all of the semiconductor companies are adopting their products from Cadence or peers for the design of the chips. The secular tailwind for the semiconductor industry in cloud, artificial intelligence, Internet of Things, electric vehicles and automation means that the complexity of chip design is increasing and the resultant demand for EDA is now structural.  

Cadence is well placed to harness several opportunities.

Firstly, the slowing of Moore's Law has opened up growth opportunities for the industry as more emphasis is placed on innovative chip designs which could support the EDA industry gaining a structurally higher share of semiconductor R and D spending.

Secondly, Cadence benefits from the incremental demand from system companies because semiconductor performance has become critical to their competition to win market share. For example, the GPU chipmakers Nvidia and AMD have reduced the new product cycle from two years to one year in order to meet customers demand for the latest AI hardware.

Thirdly, Cadence has the potential to increase its profit margin and growth by reinvesting into adjacent areas like Simulation.

And finally, Cadence has already introduced AI into its design systems which we see as another secular growth opportunity with their technology knowhow. We believe that Cadence is also in a strong position to grow in the adjacent simulation market with the potential to disrupt some of the incumbents in that market.

This could enable Cadence to grow their profitability as they enter a higher margin business. From a thematic perspective, Cadence sits under the Future of Technology mega theme with specific exposures to themes such as cloud and AI outsourcing for productivity and robotics and automation.