Wall Street is starting to layout for the next wave of AI investment frenzy! Citigroup bets that the strongest trend will be EDA software.

Wall Street financial giant Citigroup recently covered the stock ratings and future 12-month target prices of the world's two largest EDA super giants - Synopsys, Inc. (SNPS.US) and Cadence Design Systems (CDNS.US) in a research report, giving both EDA chip design software leaders a "Buy" stock rating. The Citigroup analyst team bets that these two EDA giants will be the strongest investment theme in the next wave of investment frenzy surrounding AI. Citigroup's optimism for these two EDA software giants lies in the unprecedented global AI wave, which has highlighted the increasing role of chip companies in the electronic design automation software ecosystem, especially in the field of AI chips. With the adoption and increasing penetration of advanced AI-assisted tools in the EDA software ecosystem, chip design customers have generally reported faster design cycles and much higher efficiency. As of the closing of the US stock market on Monday, fueled by the growing dovish stance of the Federal Reserve and the continued explosive growth performance of Alphabet Inc. Class C, Gemini 3, and NVIDIA Corporation, the AI bubble narrative has significantly cooled down. Technology stocks closely related to AI have all seen a major rebound. With this wave of tech stock rebound and the boost from Citigroup's latest research report, Synopsys, Inc. saw a rise of over 4% in its stock price on Monday, while Cadence Design Systems saw a rise of over 1%. In the past six months, the stock prices of the two EDA giants have failed to keep up with the rising trend of global chip stocks driven by the AI wave. Synopsys, Inc. has seen a decline of about 22%, while Cadence Design Systems has declined by 5%, significantly underperforming the global chip stock benchmark - the Philadelphia Semiconductor Index, as well as the US stock market benchmark - the S&P 500 Index. The core logic behind this underperformance lies in the discount effect of political risks associated with GEO Group Inc (especially the multiple upgrades in regulatory policies by the US government towards their important market China this year), as well as the sustained strong negative catalyzing effect brought about by the recent "AI bubble" narrative sweeping the global financial markets. Known as the "mother of chips," EDA software is a tool necessary for chip design, earning the reputation of being the "mother of chips." As leaders in the chip design field such as NVIDIA Corporation, Broadcom Inc., AMD, and cloud computing giants like Amazon.com, Inc. and Microsoft Corporation accelerate the development of high-performance AI chips, there is a growing demand for EDA software capable of designing more complex architecture and energy-efficient AI chips while accelerating the chip design process with new AI technologies. The demand for AI computational infrastructure systems is growing exponentially, leading global tech companies to accelerate the upgrading of high-performance AI chips with more complex architectures. Synopsys, Inc. and Cadence Design Systems, as the two leading giants in the EDA software ecosystem, are well positioned to provide EDA software for designing cutting-edge chips. For example, with industry leaders such as NVIDIA Corporation, AMD, Broadcom Inc., and Apple Inc., as well as cloud computing giants like Alphabet Inc. Class C, Amazon.com, Inc., and Microsoft Corporation accelerating the development of high-performance AI chips, they have an increasing demand for Synopsys, Inc.'s EDA software capable of designing more complex AI chips and using new AI technologies to accelerate chip design. In addition, chip manufacturing leaders such as Taiwan Semiconductor Manufacturing Co., Ltd, Samsung Electronics, and Intel Corporation are important customers for Synopsys, Inc. and Cadence Design Systems, with their EDA products and technologies playing a crucial role in optimizing chip manufacturing and accelerating the development of new chip process nodes. As a global leading semiconductor foundry, Taiwan Semiconductor Manufacturing Co., Ltd. extensively uses Synopsys, Inc.'s EDA tools and IP solutions in its advanced manufacturing processes (such as 5nm, 3nm, and the upcoming 2nm and below). Synopsys, Inc.'s design tools help Taiwan Semiconductor Manufacturing Co., Ltd. and its customers optimize chip design architecture to meet strict requirements for power, performance, and area (PPA). Since the popularity of ChatGPT in 2023, Synopsys, Inc. and Cadence Design Systems have integrated "AI tools" deeply into their EDA software ecosystem, focusing more on the "full-stack AI+EDA platform". Synopsys, Inc. focuses on building the ecosystem of "full-stack AI EDA + GenAI assistant" with Synopsys.ai + Copilot, covering AI-driven chip design from system architecture to manufacturing, and is the first in the industry to offer a "full-stack AI-driven EDA suite". The official positioning of the Synopsys.ai full-stack EDA suite is as "the industry's first full-stack AI-driven EDA suite covering from system architecture to manufacturing," featuring AI-driven chip design process optimization, exclusive data analysis, platformized generative AI capabilities, spanning front-end chip design, backend implementation, verification, simulation processes, and final testing. Cadence Design Systems has also taken similar steps in the "AI+EDA" direction, recently launching the JedAI data and AI platform to support its range of AI tools (such as Verisium, Cerebrus, Voltus InsightAI, ChipGPT), emphasizing the use of a unified data base to connect verification and implementation in multi-engine and multi-round operations, improving efficiency in large-scale SoC projects. In particular, the concept verification of the LLM assistant ChipGPT has been implemented with customer PoC: a dialogue-based collaboration and knowledge retrieval from specifications to design based on LLM, significantly shortening the cycle from specification to finished product, according to Cadence with customers like Renesas. Citigroup's senior analysts Kelsey Chia and Christopher Danely stated in their latest research report for investors, "Besides being the most fundamental software layer in the semiconductor value chain, we believe the EDA software ecosystem is emerging as the backbone force behind the next wave of global AI frenzy and AI investment fervor, especially by extending artificial intelligence from software to the physical world through chip-to-system level simulation, supporting sustainable double-digit revenue growth and over 40% normalized operating profit margin. Therefore, we are covering these two EDA giants for the first time and giving them a 'Buy' rating." Citigroup also provided a 12-month target price of $385 for Cadence Design Systems and $580 for Synopsys, Inc. As of the close of the US stock market on Monday, Cadence Design Systems closed at $304.47 and Synopsys, Inc. closed at $404.63. "Given that EDA has underperformed the S&P 500 Index for the past two years, we believe that the valuations and market expectations of the two EDA giants have been reset, creating very favorable conditions for fundamentals to outperform the market," said Citigroup analyst Chia. Statistics show that Synopsys, Inc. and Cadence Design Systems collectively hold about 70% of the global EDA software market share, and have demonstrated long-term sustainable revenue growth of 15% to 20%. Chia added, "Due to the critical operational attributes of EDA software workflows, the industry's revenue has shown strong fundamental resilience, achieving better year-over-year growth than the chip industry even during semiconductor down cycles in 2012, 2019, and 2023. With AI-enabled tools doubling chip design engineers' productivity, we expect the share of EDA in the overall chip industry R&D budget to increase from the current 13% to 15% further." The Citigroup analyst team also pointed out that Synopsys, Inc. and Cadence Design Systems have expanded their product portfolios through acquisitions to extend from chip design to full-stack simulation at the chip-to-system level. Overall, this Wall Street financial giant tends to favor Synopsys, Inc. more than Cadence Design Systems, but holds a very optimistic bullish stance on both companies. Citigroup analysts Christopher Danely and Chia further commented, "We prefer Synopsys, Inc. over Cadence Design Systems as we believe the current 30% valuation discount of Synopsys, Inc. compared to Cadence Design Systems should gradually narrow to its historical average of about 15%. With the more volatile and less profitable IP business accounting for as high as 30% of total sales at Synopsys, Inc. expected to significantly decrease to 18% by 2026, the profit margin gap compared to Cadence Design Systems is expected to narrow to only 4 to 6 percentage points by 2026, compared to the current gap of 7 to 9 percentage points." EDA chip design software, known as the "mother of chips," is also highly favored by other Wall Street financial giants as a key sector in the semiconductor industry. Goldman Sachs Group, Inc., Wells Fargo & Company, and Oppenheimer, among other Wall Street giants, all believe that the EDA software field will be the biggest winner after the AI GPU/AI ASIC computing chain, HBM storage systems, Chiplet advanced packaging systems in the continuing global AI wave, and will subsequently benefit from the unprecedented AI infrastructure wave. Goldman Sachs Group, Inc. also gives a "Buy" rating to Synopsys, Inc. and Cadence Design Systems, and provides target prices of $600 and $410 respectively, which are more aggressive than Citigroup's first bullish targets.