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Let me be clear about what this post is and isn't. This is not a fair value analysis. I'm not going to build a DCF or tell you what Synopsys (SNPS) or Cadence (CDNS) is "worth." This is a post about relative valuation: why I think these two stocks look undervalued today compared to the prices they were trading at not long ago, and why I believe the narrative pushing them down is wrong.
The Narrative
The story weighing on both stocks is simple: AI is coming, and it will replace them.
The logic goes like this. We now have AI systems powerful enough to attack the hardest problems in mathematics, possibly even the Millennium Prize Problems. If AI can do that, surely it can handle electronic design automation (EDA), which is not nearly as hard. Once AI can write EDA software, the Synopsys and Cadence duopoly collapses.
Here's the thing: the first part of that argument is true. A sufficiently powerful AI almost certainly can solve EDA problems. I'm not disputing that.
What I'm disputing is the conclusion.
First, What Do These Companies Actually Do?
Before we can judge whether AI threatens these businesses, we need to understand how they make money.
Synopsys and Cadence make the software required to design and manufacture semiconductor chips. Almost anything you own that contains a chip was touched, somewhere along the way, by their tools or their IP.
They sell to two broad groups of customers. The first is chip designers such as Nvidia, Qualcomm, AMD, and Apple, who use the tools to design, simulate, verify, and lay out their chips. The second is chip manufacturers and memory makers such as TSMC, Samsung, Micron, and Intel, who work with these tools to develop process technologies and to make sure designs can actually be built on their fabs.
That's the business. Now let's return to the narrative.
The China Question
Ask yourself this: why is there a duopoly at all?
EDA is a lucrative business. It is also, increasingly, a national security issue. The US has used access to these tools as a lever in its technology competition with China. If there were ever a country with the motivation, the money, and the talent to build a homegrown alternative, it's China.
And China has tried. It has well-funded domestic EDA companies, enormous state support, and a deep pool of highly skilled engineers. I'm talking specifically about engineers trained within China, working with the data China can supply them, not people with access to US-based know-how. The lack of a competitive Chinese alternative at the leading edge is definitely not due to a lack of knowledge, skill, or ability.
So if capable, motivated, well-funded engineers haven't been able to break the duopoly, what exactly is stopping them? It isn't the ability to write software. And if the barrier isn't writing software, then why would AI, which is essentially a very good software writer and problem solver, change the picture?
It doesn't.
Where EDA Sits in the Chip Economy
The second point is about where EDA sits in the chipmaking process and how much it costs relative to everything else.
EDA sits at the very core of chipmaking, yet as a fraction of the total spend to bring a leading-edge chip to market, it's a small amount. The bulk of the money goes to engineering teams, masks, wafers, fabs, and years of development time.
Now consider what happens when something goes wrong. If there's a fault in the EDA tooling, you usually don't find out cheaply. You find out after tape-out, after the masks are made, after the wafers come back, after months of time and enormous amounts of money are already gone. At the leading edge, a single respin can cost tens of millions of dollars and, worse, can cost you your market window.
Modern chips rely on billions of transistors and countless subsystems working together with little to no tolerance for error. There is a combinatorial explosion of possibilities that must be sorted out to get a functioning device at the state of the