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These 2 High-Growth Software Stocks Are Just Getting Started, Says Analyst

Cloud computing, artificial intelligence, edge computing, AR/VR, autonomous vehicles - all technologies set to become more prominent as the new decade progresses. Each has one more thing in common: they all require software to act as the engine keeping them ticking along. Take this idea one step further and it stands to reason that the companies providing software solutions to the tech pioneers will benefit from the new paradigm.

Baird analyst Joseph Vruwink recently pulled the trigger on 2 software stocks, initiating coverage on both. As Baird is ranked second on the list of Top Performing Research Firms, it’s worth taking heed when one of the firm’s analysts gets the ball rolling on a new stock.

Furthermore, we ran both tickers through the Stock Screener tool at TipRanks to confirm that Baird is in the majority on Wall Street in recommending these equities. Here’s what you need to know about them.

Synopsys (SNPS)

Let’s start off with Synopsys, a company that provides software and intellectual property solutions for the design and testing of chips (integrated circuits) and computer systems. The company’s technology is present in self-driving cars, artificial intelligence, and Internet of Things (IoT) consumer products.

Synopsys stock has been on an almost constant upward trajectory since 2016, culminating in 2019’s market beating 69% gain. The performance has stretched further into 2020, too; Synopsys’ share price is up by 17% year-to-date.

Last year’s share price performance was reflected in its business operations, as well; in fiscal 2019, sales grew to $3.4 billion, compared to the previous year’s $3.1 billion. The company expects revenue for fiscal 2020 to come in at around $3.6 billion.

Synopsys is the largest provider of Electronic Design Automation (EDA) tools in the US. EDA is a major component in chip development and its workflows, with the EDA industry’s growth closely aligned with broader semiconductor R&D growth. Following a lean year in 2019, R&D spending looks ready to ramp up again in 2020. As Synopsys is at the forefront of digital design and verification, and most of its clients are in the semiconductor industry, it stands to benefit from these development activities.

Baird’s Joseph Vruwink highlights the company’s impressive 2019 and urges investors not to miss an “encore in 2020." Additionally, the analyst notes accelerating EDA growth, broadening IP opportunity and rising margins are reasons to remain positive on the stock.

Vruwink said, “With customers set to accelerate R&D spend during 2020-21 and product innovation creating more avenues for secular growth, Synopsys is positioned to deliver attractive combination of revenue growth (HSD+) and margin expansion (500bp+ opportunity). We believe Fiscal 2020 through 2022 should see operating margin expand from ~25% toward ~30% as Synopsys leverages the significant investment in headcount and personnel-related costs (both organic and inorganic) that took place during recent years.”

All of the above led Vruwink to initiate coverage on Synopsys with an Outperform rating along with a price target of $190. Should the target be met, investors stand to take home returns in the shape of 14%. (To watch Vruwink’s track record, click here)

A full house of Buys – 10, in fact – provides the software designer with a Strong Buy consensus rating from the Street. The average price target comes in at $169.10 and indicates modest upside of 2%. (See Synopsys stock analysis on TipRanks)

Cadence Design Systems (CDNS)

Not to be outdone by Synopsys, fellow EDA software provider Cadence Design Systems has been beating the market, too. The company’s share price is up by 13% year-to-date and continues last year’s excellent performance (the stock rose by 63% in 2019). Investors were buoyed by Cadence’s innovative tech offering, solid financials and long-term growth prospects. Having said that, investors are not the only ones impressed with the San Jose-based company. For the sixth consecutive year, Cadence made Fortune’s list of 100 Best Companies to Work For.

The company is also aiming for further expansion outside of its traditional EDA market. Using its technical capabilities, Cadence is pursuing solutions for hardware/software integration and system analysis, focusing on two areas in particular- simulation and embedded security. Vruwink points out that individually, each area has grown at a double digit rate this cycle and provides a multi-billion dollar TAM (total addressable market) opportunity. Add this to an EDA market expected to gain by high single digits, and the two form the basis for the company’s TAM expansion strategy over the next 5-10 years.

Vruwink sees targeted IP growth, TAM expansion and acceleration in its core EDA business as key drivers for Cadence this year.

The analyst said, “We believe the company is well positioned to outperform in 2020 through a combination of accelerating customer development activity (+ for EDA tools), strong IP momentum (including AI/ML, auto, communications) and continued success in growing system-level tools. We view valuation as reasonable in comparison to other design peers with potential for further re-rating as company executes on secular growth opportunity/ TAM expansion while sustaining strong profitability.”

Bottom-line, then? Vruwink initiated coverage of Cadence with an Outperform rating. In addition, the analyst set the price target at $93, indicating potential upside of 16%.

Out on the Street, Cadence’s Strong Buy consensus rating breaks down into 7 Buys and 2 Holds. With an average price target of $86.89, analysts expect the next 12 months to provide investors with 9% upside. (See Cadence stock analysis on TipRanks)