This Stock is Set to Double in 3 Years

In 1959, Bell Labs researchers Dawon Kahng and Mohammed Atalla developed the world’s first truly compact semiconductor, the MOSFET transistor. Their transistor wasn’t the first, but it was the first that could be miniaturized and mass-produced practically.

And when I say “mass-produced,” I really mean it…

Analyst Jim Handy, talking to the Computer History Museum, estimated that some 13 sextillion (13, followed by 21 zeros) transistors have been manufactured since the very first prototype in 1947. By his estimate, that makes the transistor the most numerous manmade item in all of human history by a comfortable margin.

In fact, as of 2018, there are probably more transistors on Earth than there are grains of sand.

Good thing, then, they’ve been growing smaller by the year.

Back in 1954, colorful Regency TR-1 “pocket” radios sold for the equivalent of $476 in today’s dollars. The TR-1’s four pricey transistors meant a little less than 20% in profits for Regency.

The Sony TR-63 hit shelves in 1957. It sported six transistors and sold for roughly $354 of today’s dollars.

Smaller, more powerful, cheaper – with fatter profit margins, to boot.

By 1959, there were 6 million personal radios in America that brought in $1.3 billion (in 2020 terms) in profits for the three Japanese companies, Sony, Sharp, and Toshiba, that made them.

In 2020, every single iPhone 11 Apple Inc. (NASDAQ: AAPL) makes sports 8.5 billion transistors, more than 171 million per square millimeter of chip. Estimates vary, but Apple may make 40% in profits on every unit sold.

You could easily argue the transistor belongs up there with the wheel, the nail, and the brick among the inventions that “changed everything.” It has certainly generated incalculable wealth.

Today, the semiconductor industry is worth around $430 billion and counting.

And, as I’ll show you in a second, transistors can still get smaller and more ubiquitous. And, just as importantly, they can still build fortunes as only technology can.

Semiconductors: Smaller Is Definitely Better

From fist-sized to sub-microscopic size, the transistor has been shrinking in inverse proportion to its economic and social importance for decades.

Now it seems semiconductor makers are kicking things up – or, maybe it’s better to say, down – a notch.

5G telecom, of course, is the profit catalyst here.

The smartphone industry is blasting full-speed ahead into 5G “ultra” broadband. We’re talking theoretical speeds up to 20 times faster than the average home Wi-Fi connection today.

To get there and take full advantage, we’ll need more than just powerful semiconductors, but sensors, antennas, a whole host of hardware, and more. Businesses will undergo a lucrative upgrade cycle the likes of which have rarely been seen before.

Every server farm in the world that handles wireless traffic will also get new gear – 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 Intel Corp. (NASDAQ: INTC) says spending on 5G systems across the board will be the largest capital upgrade program in history. According to IHS Global Insight, this 5G rollout is expected to generate some $12.3 trillion of global economic output over the next decade.

Into this fertile environment comes a new development in semiconductor design.

IBM, in partnership with U.S. semiconductor foundry Globalfoundries and Samsung Electronics Co. Ltd., announced in April that it is developing a 5-nanometer transistor. At that size, you could get around 30 billion transistors into a space smaller than the average fingernail.

These advances will connect even more devices to the Internet of Things, increase device longevity and battery life, and boost raw computing power – making billions of dollars in the process.

Of course, to do any of that, those tiny transistors need to actually function properly. As you’ve seen, with billions of them in just one mobile device, there’s positively no hope of checking each one by hand.

That’s where electronic design automation (EDA) comes in. It’s absolutely essential to the design and good functioning of semiconductors.

The Chip King of San Jose

California-based Cadence Design Systems Inc. (NASDAQ: CDNS) has its roots dating back to 1988, resulting from the merger of SDA Systems and Ecad Inc.

It was among the leading software and hardware design firms in Silicon Valley at the time.

Today, it is an EDA leader, handling the core development work for chips, printed circuit boards, and all related hardware systems. In one stock, you get access to the booming semiconductor sector.

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.

As you can imagine, that’s quite a time-saver. Engineers from Freescale Semiconductor – a semiconductor manufacturing spinoff from Motorola Solutions Inc. (NYSE: MSI) – use the software to perform simulations up to 10,000 times faster than it would normally take in daily use.

That, in turn, 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 chipmakers to bypass going through cycle after cycle of designing a new semiconductor, arranging the manufacturing for it, and then testing it – even for custom jobs.

Simply put, if you’re a chip manufacturer, Cadence is the one-stop shop for everything you need. And this goes way beyond 5G-enabled hardware. Cadence offers design and quality control tools for high-performance audio and video processors, machine learning applications, and a lot more.

For example, the Xbox One gaming console from Microsoft Corp. (NASDAQ: MSFT) uses four Cadence-designed processors to create immersive soundscapes. Microsoft is playing this close to the vest, but it wouldn’t be surprising to find out Microsoft’s new Xbox Series X game console, to be unveiled this autumn, used them, too.

Advanced Micro Devices Inc. (NASDAQ: 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 United States during that time, sales were up 26.3%.

So with 5G and miniaturization as key drives, the chip industry should remain robust, come what may.

Since Cadence rebounded on March 18, it had gained 115% through the market’s peak on Sept. 2 – much more than double the S&P 500’s return over that 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.

— Michael A. Robinson

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Source: Money Morning