Soon, blog teardown reports will show which suppliers won coveted slots in the new Apple (AAPL) iPad. As I've written previously, two winners may be Qualcomm (QCOM), which likely won the LTE baseband business, and Nuance (NUAN), which likely powers iPad's Siri-Lite.
However, as much as I like those two stocks, neither is an under the radar pick. Most investors already know who supplies Apple with its various components, such as Broadcom (BRCM), who supplies Wi-Fi and Bluetooth chips, and Qualcomm, who supplies baseband chips. Those selling to these and other suppliers, however, are less known.
In this camp are Electronic Design Automation ("EDA") stocks, such as Cadence Design (CDNS). These stocks make their money by selling software tools used by engineers to design chips for consumer devices, such as iPhones and iPads.
Smart phone and tablet manufacturers, including Apple, are demanding chips do more while using less energy and taking up less space. These feature rich silicon solutions are increasingly challenging to design and test. Yet, the pressure has never been higher to speed new products to market. As a result, chipmakers are investing heavily in software to design, test and troubleshoot manufacturing hiccups prior to mass production.
This demand drove Cadence's sales up 23% in 2011 to $1.15 billion. At the same time, Cadence's non-GAAP operating margins doubled to 18%. The strength is expected to continue this year too. Cadence is guiding 8-11% sales growth in 2012 as chipmakers, such as Apple's A5 and A5x chip supplier Samsung, focus on next generation 20 nanometer designs.
· Last summer, Samsung used Cadence to design a 20 nm ARM Cortex-M0 microprocessor featured chip
· Last fall, Samsung, which controls ~41% of the DRAM market, announced a $10.2 billion program to produce 20 nm memory.
· In October, ARM Holdings (ARMH) and Cadence taped out a 20nm ARM Cortex A15 for TSMC 20 nm process.
The street seems to be gaining confidence too. Over the past sixty days, analysts have ratcheted their earnings expectations for 2013 up to $0.86 from $0.74, a 16% lift. The company has beaten those analyst's estimates in each of the past four quarters, suggesting the street is playing catch-up. Despite the increasing enthusiasm, bears haven't covered positions... yet. As of the last short report, they were still sitting on nearly 7 days of average volume short.
Supplying software to the biggest chipmakers helps insulate Cadence from risks tied to OEM's switching suppliers. Last summer, rumors suggested Apple was looking at Taiwan Semi's (TSM) to supplement or replace Samsung. Given TSMC was announcing a deeper collaboration with Cadence at the same time, Cadence's risk from Apple changing horses appears minor.
Importantly, Cadence exited 2011 with a book-to-bill ratio above 1 and a $1.7 billion backlog. Of the company's $308 million in Q4 sales, products accounted for $177 million and maintenance and services generated $101 and $30 million each, respectively. The sharp rise in revenue boosted operating cash flow to $240 million for the year, up from $199 million in 2010. This pushed Cadence's cash and equivalents up $44 million to $602 million.
Given the chip industry is improving in line with seasonal trends, capital spending at foundries is likely to support Cadence seat growth this year. In January, the SEMI book-to-bill clocked in at 0.95; up from a dismal 0.71 in September and above the 0.85 in January. Consumer's ongoing appetite for faster, more unified consumer devices isn't waning, suggesting Cadence shareholder's will benefit as Apple and competitors release new products.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CDNS over the next 72 hours.