Does the EDA industry get any respect?

How many times have we heard that the EDA industry gets no respect? It is true that the EDA industry is tiny compared to the market that it serves. Several companies, CEOs and financial jugglers have tried to find ways to leverage a little more of the pie for the industry and for themselves. I wondered if this is a unique situation, or if we are actually quite normal. I started to think about the automotive industry and about the similarities between the two markets. In the auto industry there are a small number of large manufacturers of cars, perhaps about the same order of magnitude as systems/semiconductor companies. The auto makers, for the large part, create their functionality from components they obtain from other people with a bit of their own unique sauce. The same is true for a typical chip. The auto companies make a huge investment in the creation of a new model that requires them to sell huge quantities in order to recoup their initial investment - it is all sound very similar to the EDA and the companies they serve. So how do the suppliers to the auto industry fare? Are they respected?

If we look at the component suppliers to the auto companies, companies such as Bosch, Cummins, Johnson Controls, Lear, Lucas, Goodyear, Magneti Marelli, Visteon, we see that they are spread across many disciplines - tires, electronics, engines, braking systems, seats. Each of these component suppliers attempt to sell into all of the large auto companies. So far very similar. The first big difference we see is that there are no component suppliers that try and sell complete packages. They tend to be more focused on one, or a few, types of components.

Let’s look at the financials. GM and Ford are the two largest auto manufacturers in the US. I will use just one financial metric, the PE ratio. This basically tells us how much people (investors) are willing to pay for the company based on their earnings. Larger numbers mean the company is more highly valued. For the US auto makers, they trade with a PE ratio of between 4 and 6. GM recently went through a bankruptcy and had to be bailed out by the government. The suppliers trade for PEs of about 9 to 12. So, in general they are valued higher than the auto manufacturers. However, the market average PE is about 20, meaning that the whole industry is considered below average.

Now let’s turn our attention to semiconductors and EDA. If we look at some of the largest chip makers in the US - Nvidia, Intel, AMD - we see PEs of between 5 and 15 with an average toward the higher end of that range. Apple, the darling of systems these days trades for a PE of 15. EDA companies - Mentor, Cadence and Synopsys - trade for between 17 and 21. So we see that the market actually believes that the earnings from the EDA companies are more highly valued than those of the semi companies, and more highly valued than even Apple. I realize that this is just one metric and that the sizes of the markets are very different, but when the EDA industry says they get no respect from Wall Street, I tend to disagree. They get the respect that they deserve and more.

What do you think? Share your comments below.