In note published today by Needham & Company, analyst Rich Valera voices positive outlooks for EDA generally and sees more upside for Magma.
“EDA stocks, generally perceived as stodgy by most semi investors, have sharply outperformed their semiconductor peers (as reflected by the SOX index) in the third quarter and year to date. While the volatile SOX reflects the market’s concerns regarding some recent softening of demand in certain sectors, EDA vendors, whose fortunes are tied to semi R&D spending, appear to be benefiting from a late cycle recovery in EDA spending largely consistent with historical trends. While the duration and magnitude of this recovery will ultimately be affected by the trajectory of semi revenue, we would expect another 2-3 quarters of solid EDA spending regardless of the trajectory of semiconductor revenue. Our top EDA pick is Synopsys (SNPS, Buy), which has underperformed its peers in 2010, but has the most attractive valuation and is poised to see renewed growth in 2011.”
“Magma Design (LAVA, Buy) rode a steady stream of ‘beat and raises’ to the
strongest performance of any EDA stock this year, obviously aided by a
depressed starting base. While we expect the magnitude and pace of upside
‘surprises’ will likely moderate, we think the reasonable forward P/E multiple
(~13x) leaves some room for upside with continued solid execution.”