The global chip shortage has created a major obstacle to the sales of new cars, which are running about 22% below pre-pandemic levels, according to Federal Reserve data.

This is causing serious pain to major automakers, and the good folks at Ford Motor Co. are learning right now that pain is a great teacher.

No Wonder Ford wants more control over its own destiny, and in order to get it, they recently entered into a strategic pact with chip producer Global Foundries Inc. (GFS).

The companies didn’t provide estimates of the financial value of the alliance. But industry analysts say it could easily be several billion.

That news was followed a week later on November 24 that Samsung Electronics will invest $17 billion in a new Texas chip factory.

I believe these two announcements prove the massive potential investment behind the global chip boom has years to run.

And I’ve identified a great chip supply firm that stands to gain from semiconductor sales across the board.

Let me show you why it’s set to double earnings in just a little over three years…

The Factory Scramble

With shipping in chaos and the trucking industry suffering from a huge shortage of drivers, Ford has had huge trouble getting the chips it needs to make cars.

It’s made the company rewind the clock on decades of outsourcing of its components to other firms, and often abroad.

With the new deal, Global Foundries should give Ford first priority on some chip production. Ford is even considering starting to design some of its chips in-house, to prevent future shortages and improve the functionality of its cars.

Of course, that won’t solve the fundamental problem that there are just not enough chips being made today.

That’s why Samsung announced that they will be constructing a $17 billion chip factory in Texas, following on similar announcements for U.S.-based plants by Intel Corp., Texas Instruments Inc., and a $12 billion plant in Phoenix by Taiwan Semiconductor Manufacturing Co.

All in all, the industry is set to invest $146 billion to expand chip manufacturing this year alone.

That’s 50% more than before Covid, and 100% more than in 2016.

For example, TSM is working with Sony Group Corp. to build a $7 billion chip plant in southern Japan. A partially state-owned Chinese semiconductor company in September also announced a new, $9 billion chip plant in Shanghai.

So, as you can see, a savvy chip supplier able to serve multiple customers faces a target-rich environment with all these new factories popping up.

It’s what makes Cadence Design Systems Inc. (CDNS) the perfect play on the global chip boom.

Computers On Wheels

Based in San Jose, CA, Cadence stems from the 1988 merger of SDA Systems and Ecad Inc. Both were among the leading software and hardware design firms in Silicon Valley.

Today, Cadence is the clear leader in a field known as electronic design automation (EDA). That means the firm’s software handles the core development work for its clients, designing the basics of chips, printed circuit boards, and all related hardware systems.

Cadence’s leading chip firms. For example, every firm that designed first-generation 5G hardware tapped into Cadence’s radio frequency (RF) chip designs and modules.

The process of using Cadence’s pre-designed chip frameworks can save companies thousands of man-hours in development time. That means millions in revenue because, in the chip world, speed to market is the name of the game.

Cadence also provides an extensive software ecosystem for car chips. This includes semiconductor designs for infotainment, functional safety solutions, and all the testing tools needed to ensure that every piece of a vehicle’s software will function as planned.

After all, no automaker can risk implementing automated parking, lane departure, adaptive cruise control, and similar features without having 100% confidence that the systems won’t endanger drivers.

The need for car chip designs and testing solutions will only grow as cars get more and more advanced. In just a few years, regular cars have gone from using barely any semiconductor chips to having 100 to 150 chips each, a difference of thousands of dollars.

Modern electrical vehicles often have up to 3,000 chips. And with more automation, safety features, connectivity, and entertainment in each car, those numbers will only increase.

And so will the demand for Cadence’s products.

The need for computer components is not only driven by the automotive market but also the build-out of the metaverse. Companies like Nvidia and Facebook are dedicating billion to make sure this tech can be built out as it becomes more widespread each and every day.

Maximum Performance

Cadence’s chip testing technology is even used by the Pentagon, to ensure chips used in national defense meet the highest standards for aerospace and military applications.

The company has more than 5,600 research and development engineers, with another 1,900+ working in the field. They’re distributed across 23 global development centers and have created Cadence’s impressive portfolio of over 1,500+ patents.

In short, any competitor to Cadence would have to overcome multiple barriers to entry.

To boot, Cadence’s stock is benefitting from a series of strong earnings reports. The September quarter was no exception. The company beat expectations by reporting adjusted per-share earnings of 80 cents, rather than the 75 cents analysts were betting on.

Sales were $751 million, better than the expected $741 million. Compared to the same quarter last year, Cadence’s earnings were up 14% while sales had grown 13%.

On top of all that, Cadence also raised guidance for the fourth quarter of the year. And this is no earnings blip.

Now then, I last recommended this stock on September 11, 2020. Since that time, it’s crushed the overall market with returns of 81.4%

I see even more upside ahead. Over the past three years, Cadence has grown earnings per share at an average rate of 23%. So, they could very well double in price in just a tad over three years.

Add it all up and you can see that this winning chip-supply firm can improve the value of your portfolio for many years to come.

Cheers and good investing,

— Michael A. Robinson

Source: Strategic Tech Investor