Silvaco Analysts Recommend The Stock As Unique Small-Cap Opportunity In Semiconductor Design

Rosenblatt analyst Blair Abernethy initiated coverage on Silvaco Group Inc SVCO with a Buy rating and a price target of $26.

According to Abernethy, Silvaco, which conducted its initial public offering (IPO) in early May, will continue to benefit from the secular tailwinds driving the electronic design automation (EDA) software market. It is well-positioned to leverage its established technology computer-aided design (TCAD)/EDA software tool franchise to drive healthy organic revenue growth with improving operating margins over the medium term.

Silvaco holds a strong TCAD market position in the display, memory, and power markets, with opportunities for additional growth from its new FTCO solution and SIP portfolio. Abernethy said Silvaco has added capital to support its go-to-market and tuck-in technology acquisition programs. At current price levels, Abernethy noted the stock as attractive.

Needham analyst Charles Shi initiated coverage with a Buy rating and price target of $28.

Shi noted that Silvaco is the first and only small-cap EDA company to enter the equity market in many years. The sector has been dominated by large-cap companies like Cadence Design Systems, Inc CDNS and Synopsys, Inc SNPS.

According to the analyst, Silvaco is a primary provider of TCAD, the foundational EDA that enables design technology co-optimization (DTCO) in today’s semiconductor manufacturing and design. Silvaco generates ~60% of its revenue from TCAD, a branch of EDA that models the underlying physics of semiconductor processes and devices.

Without TCAD, manufacturers would not be able to promptly bring new process technology to the market, and designers would not be able to design chips properly to the underlying physics, Shin said. He noted TCAD, as a sticky and profitable business, will remain Silvaco’s most important growth driver over the coming years.

Shi noted that Silvaco generated an 8% operating margin in 2023 but is targeting 25%+ over the long term. With the EDA industry growing at a low double-digit pace and Silvaco growing in line or faster than EDA, the analyst noted that the company could expand its operating margin beyond 20% in just 1-2 years. 

He expects the company to improve its operating margin to 25% while maintaining double-digit growth over the coming years. Shi noted Silvaco provides investors looking to invest in EDA, a rare small-cap alternative to CDNS and SNPS.

Shi projected 2024 revenue and EPS of $66.4 million and $0.30, respectively.

Price Action: SVCO shares traded lower by 0.85% at $18.12 at the last check Monday.

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