To understand today’s investment potential, I have a visual aid that you can access right now.
In fact, it’s on your hand.
Take a moment and look at one of your thumbnails. Even if you have a large one, it’s probably less than one square inch.
Now, imagine putting 1,000 tiny electronic objects on it.
Seems like it would be pretty difficult to get all of those on there, right?
Now, imagine millions of tiny electronic objects are sitting on your fingernail.
Looking at your hand, that probably seems downright impossible.
And yet, it is possible – along with so much more – thanks to the advancements in semiconductors.
IBM, in partnership with Globalfoundries and Samsung Electronics Co. Ltd., announced in April that it is developing a 5-nanometer chip that could squeeze 30 billion transistors into a semiconductor the size of your fingernail.
These advancements will play a role in everything from connecting people to the Internet of Things (IoT) to increasing smartphone battery life up to three times to improving the longevity of your other tech devices.
This is big business, with the semiconductor market worth $430 billion.
Of course, as you can imagine, getting all of those tiny transistors to work is tricky stuff.
Today, I’m going to show you a leader in electronic design automation (EDA), which is essential to the design of semiconductor chips and making sure they work properly.
This aggressive firm can handle the core development work for chips, printed circuit boards, and all related hardware systems.
The Relentless Drive of Better, Faster, Smaller
Now then, the supply firm I have in mind gives us not only access to the whole semiconductor sector, but to global trends reshaping the digital economy.
Two in particular stand out. First is the relentless drive toward miniaturization moving at breakneck speed.
Second is 5G, which is a game changer for modern telecommunication and mobile computing.
Our aggressive chip supply firm is jumping on these trends in a big way.
But before I go any further – I’ll have everything you need to know about this firm and how it can double your money in just a minute – let me note that it can be difficult for the human mind to grasp just how complex semiconductors have become.
The relentless drive to have faster, better, and smaller processors for things like AI, autonomous driving, and the Internet of Things (IoT) is pushing the size of a single transistor down to just five nanometers.
A I mentioned earlier, IBM is working on such a chip, and analysts expect to see commercial production in the semiconductor market of what are known as “5nm” chips by the end of this year.
At that scale, it would take 2,000 transistors to measure the width of a human hair!
In short time, there will be 30 billion transistors on a chip the size of your thumbnail. Compare that to the just 1.3 million transistors the then state-of-the-art Nintendo 64 console could fit in the same area in the 1990s.
For us today, there’s one big catalyst we are already ahead of that will push semiconductor investments to the next level.
The entire smartphone and cellular industries are moving to 5G ultra broadband.
Virtually every aspect of mobile computing will be affected by the move to the next-gen system, offering theoretical speeds that are 20 times faster than the average home has for broadband WiFi.
Over the next several years, nearly all new smartphones, totaling more than 1 billion a year, will need to be updated.
And we ‘re not just talking chips, either – it covers sensors, firmware, antennas, and more.
Every server farm in the world that handles wireless traffic will also get new gear covering everything from switches to filters to microprocessors. Even laptops and many desktops will soon be equipped to tap into the beefed-up wireless networks.
No wonder that none other than chip leader Intel Corp. (INTC) says spending on 5G systems across the board will be the largest capital upgrade program in history.
And here are some figures to think about.
According to economic forecasting firm IHS Global Insight, this 5G rollout is expected to generate some $12.3 trillion of global economic output over the next decade.
That’s exactly where today’s chip supply firm comes in.
The King of Chips
California-based Cadence Design Systems Inc. (CDNS) has its roots dating back to 1988, resulting from the merger of SDA Systems and Ecad Inc.
They were among the leading software and hardware design firms in Silicon Valley at the time.
Today, the aggressive firm is a leader in EDA, handling the core development work for chips, printed circuit boards, wireless modems, and all related hardware systems for its clients.
Cadence’s cloud-based software lets companies run thousands of simulations at once to see how their chip designs will work in the real world.
That allows them to avoid wasting time and money on actually printing prototypes.
For instance, engineers from Freescale Semiconductor – a semiconductor manufacturing spinoff from Motorola – use the software to perform simulations up to 10,000 times faster than it would normally take in daily use.
That will ensure that demanding applications, such as 5G, will deliver the performance that consumers expect.
And they can do this all with the software from Cadence. It’s a digital tool that allows chip makers to bypass going through cycle after cycle of designing a new semiconductor, arranging the manufacturing for it, and then testing it.
Add to that Cadence’s pre-designed chips that can easily be customized in the same software, and you can start to see the beauty of Cadence’s cloud-based EDA package.
It’s a one-stop-shop for everything you need.
Now, Cadence’s software goes much further than 5G chips. The firm also offers design and checking tools for audio and video processors, machine learning chips, and much more.
For example, the Xbox One gaming console from Microsoft Corp. (MSFT) uses four Cadence-designed processors to create immersive soundscapes.
Advanced Micro Devices Inc. (AMD) uses Cadence-designed chips in every one of its laptop chipsets and graphics cards.
Now, you might be thinking that the coronavirus pandemic has thrown a wrench in this market as it has in so many other sectors.
But according to the Semiconductor Industry Association, sales are actually up. On a global basis, they rose 4.9% in July from a year ago. And just in the U.S. during that time, sales were up 26.3%.
So with 5G and miniaturization as key drives, the chip industry should remain robust for years to come.
Since Cadence rebounded on March 18, it had gained 115% through the market’s peak on September 2. That was well more than double the S&P’s return over the period.
But don’t worry, I still see unlimited upside.
For the past three years, Cadence has grown earnings at an average of 24%. That means it’s set to double in three years, and that’s just a conservative estimate.
The demand for faster and better electronic products for customers and businesses is huge, and that’s never going away.
As you can see, Cadence is a powerful way to play the heart of the digital economy.
And it should wrack up market-crushing gains for years to come.
Cheers and good investing,