The Best Semiconductor Stock to Buy in July Has Gained 1,400%

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What's the best semiconductor stock to buy in July? While investors have zeroed in on NVIDIA ( Nasdaq: NVDA ), the truth is there are many companies benefitting from the AI boom. We review why Synopsys ( Nasdaq: SNPS ) could be a top buy this month.

The company's stock is up 1,400% across the past decade and it looks well-posited to see strong gains in the next decade ahead as well.

The Best Semiconductor Stock to Buy in July

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Here are some of the highlights from the discussion between 24/7 Wall Street Analysts Eric Bleeker and Austin Smith.

• The growth in semiconductor stocks has been incredible across the past 18 months. Investors have been piling into NVIDIA, so we’ve been exploring some other potential names in the space.
• On 24/7 Wall Street, we’ve been highlighting semiconductor buy ideas across the year – in March we highlighted TSM and ASML .
• Then in May, we featured Celestica as another under-the-radar AI stock .
• And today, we're highlighting Synopsys.
• The bottom line is you should be interested in this company, because its been a long-term winner.
• It’s up 371% in the past five years, more than 1,400% in the past 10 years, and it's up nearly 80-fold since IPOing in 1992.
• The key reason for its success beyond tremendous execution by the company is that its market is very attractive.
• Synopsys builds Electronic Design Automation (EDA) software – which is the software used to make computer chips
• The market for EDA software is concentrated, with Synopsys and Cadence ( Nasdaq: CDNS ) being the two dominant companies.
• As you can imagine, AI is a large tailwind behind this entire industry. The downside to Synopsys is its exposure to AI tailwinds isn’t lost on investors! It currently trades for very expensive levels, about 65X trailing earnings.
• So, here’s what I like in the years ahead, and why Synopsys can still be a great long-term buy even at today's prices.
• First, Synopsys made a very bold acquisition of simulation software company Ansys (Nasdaq: ANSS). This acquisition is going to increase their overall capabilities.
• We believe simulation software - what Ansys produces - is another market with incredible growth potential. The bottom line is the acquisition will make Synposys' software suite much more attractive.
• The deal has been flagged by regulators in China, so it’s not across the finish line, but we do think it’s a smart acquisition if it can get across the finish line next year.
• Another reason Synopsys has strong tailwinds is almost all the largest companies are now interested in building custom chips for their data centers, so they’re attracting a new wave of customers that have very deep pockets.
• Finally, there’s a massive chip boom happening, but there’s not enough chip engineers.
• This will lead to chips of much more complexity and EDA software needing to handle a lot more of the R&D load. That should give both Synopsys and its main competitor Cadence with a lot of pricing power to raise prices and cross-sell more software.
• NVIDIA has moved to releasing new AI chips annually which means everyone in the AI space is going to have to catch up, and you can’t hire tens of thousands of new chip engineers each years because the supply is limited.
• So, we’re going to need to keep improving the EDA software to keep this pace of innovation going.
• Overall, we like Synopsys as a long-term holding. You’re buying this to hold for a decade or more. If the valuation looks a little too high, add it to a watchlist and if semiconductor stocks sell off on some near-term reduction in demand or economic weakness, keep Synopsys at the top of your watchlist.

Eric, the growth in semiconductor stocks, let's just face it, has been incredible over the last 18 months.

So investors have been piling into NVIDIA.

We've all seen that.

But we've been exploring some other potential names in the space.

And you wanted to highlight a semiconductor play today that doesn't make any chips.

What's going on?

Tell me why Synopsys is your semiconductor stock to buy in July.

Yeah, Austin, on 24-7 Wall Street, we've been highlighting semiconductor buy ideas across the year.

In March, we had highlighted Taiwan Semi and ASML.

In May, I featured Celestica's ODM as an under-the-radar opportunity.

And today, I want to feature Synopsys.

Now, the bottom line, why everyone out there should be interested in this company is because, well, number one, it's been a long-term winner.

And that's built upon a really strong foundation.

It's up 371% in the past five years.

It's up nearly 800 fold since IPO-ing in 1992.

The key reason for this is its market is very attractive.

The company builds EDA or electronic design automation software, which is the software used to make computer chips.

The market for EDA software is pretty concentrated, with Synopsys and Cadence being the two dominant companies.

Now, as you can imagine, AI is a large tailwind behind this industry, as it is for a lot of semiconductors.

So the downside to Synopsys is its exposure to these AI tailwinds is not lost on a lot of investors, and it currently trades for about 65 times trailing earnings, which is quite expensive.

So here's what I like in the years ahead, though.

First, Synopsys, they made a very bold acquisition of a simulation company named Ansys.

This is going to increase their overall capabilities quite a bit.

I believe simulation software is another market with incredible growth potential.

and it makes the software suite much more powerful.

This deal has been flagged by regulators in China, so it's not across the finish line yet, but I do think it's an incredibly smart acquisition if it can get across the finish line, which is estimated at the first half of next year.

Another reason Synopsys has strong tailwinds is almost all the largest companies are now interested in building custom chips for their data centers.

They work with other companies a lot like Broadcom or Marvell here, but this is attracting potentially a new wave of customers that have very deep pockets.

Finally, I think this one is by far the most important.

There's a massive chip boom happening right now, specifically centered around cutting edge AI chips, but there's not enough chip engineers.

When a market becomes as big as quickly as something like artificial intelligence, you're gonna have shortages people who understand these cutting edge technologies.

This will lead to chips of much more complexity and EDA software needs to handle a lot more of the R&D load.

This should give both Synopsys and main competitor Cadence a lot of pricing power on pro uh their products and ability to cross sell.

Like NVIDIA, we've talked about, they've moved to releasing new AI chips annually, which is incredibly bold, and everyone else in the AI space is going to have to catch up with this level of innovation.

And you can't hire tens of thousands of new chip engineers because our colleges aren't producing them at the levels they need.

So we're going to need to be able to keep up with this innovation via EDA software to keep the pace going.

That benefits Synopsys.

So I love it. Absolutely love it as a long-term holding.

I talked about the long-term performance earlier.

You're buying this company not to hold it for a year, but to hopefully hold it for a decade or more.

It's not gonna maybe have the same risks around cycles as NVIDIA, although it does have risks since it is levered to the semiconductor industry.

If the valuation looks a little too high, here's my recommendation for everyone out there, add it to a watch list.

And if we see a pullback in semiconductor stocks, whether from some near-term reduction in demand or just an overall market sell-off, put this one at the top of your list.

Because it's gonna give you that exposure to AI.

It's a company in a really stable market with two clear leaders.

And I think it's gonna outperform over the long run.

Eric, thank you so much for this recommendation for investors.

So just to recap, we're looking at Synopsys, and this is a company that builds electronic design automation software.

And if you're trying to look for a proxy for maybe where to orient this in your investment framework, it's not a perfect analogy, but something like Autodesk comes to mind, which provides AutoCAD software, which allows you to use software to design products and services across a wide range of industries.

It's an absolutely indispensable tool.

For many designers, engineers, and they get to benefit from the growth of the entire industry without playing favorites.

And hey, let's take a look at Autodesk, which owns AutoCAD, 3,000% returns, lifetime returns since going public, even despite recent volatility.

They're well off from their all-time highs, but we're looking at a company that's sort of similarly positioned in a different industry, putting on multi-thousand percent returns and still having an incredibly strong and defensible position in the landscape.

So I like Synopsys.

Thank you for this recommendation.

But as a reminder, this has to be viewed as a long-term holding.

This type of design software, it's the type of thing that your engineers gradually get ingrained with.

It becomes a deeper part of their workflow and their processes.

And that cycle can take a couple of years to play out.

But once you are entrenched with those designers, it really becomes an irreplaceable asset.

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