Cadence & Synopsys: The duopoly that never loses a client

May 2, 2025 7 min read

Florian

“In a gold rush, don’t invest in the gold miners, invest in shovels!“

– André Kostolany

arvy’s teaser: In every gold rush, the smartest money backs the shovel makers. Cadence and Synopsys are the unbreakable duopoly fueling the chip revolution — compounding quietly, dominating relentlessly, and growing alongside the world’s most powerful trends.

EDA.

Electronic Design Automation.

This is the software tool engineers use to design semiconductor chips. The same chips made by engineers at Broadcom for your iPhone, or at Nvidia for gaming GPUs and high-performance GPUs powering data centers behind your ChatGPT response. EDA is how you design the chip, verify and simulate it, and automate the entire design process.

EDA solutions are indispensable to every semiconductor company — and increasingly, to a growing number of “electronic systems” companies that build products around semiconductors, like modern automobiles. Think Tesla.

The semiconductor industry (chart 1) doesn’t function without EDA companies working quietly in the background.

In this space, two major players dominate.

Cadence Design Systems und Synopsys.

Chart 1: The Semiconductor Value Chain

Source: Quartr

Duopoly Dominance

Again, EDA software is mission critical. You simply can’t operate without it. Without EDA, there would be no modern semiconductor industry.

That alone already makes it attractive. Let’s dig into the industry.

The EDA market is dominated by two giants controlling 74% of it: Synopsys holds a 38% share, and Cadence 36%. It’s a duopoly.

This dominance is backed by near-100% retention rates and an 80–85% recurring revenue model (mostly subscription-based) — a reflection of how critical EDA tools are to chip development, and just how loyal their clients are. Larger companies even tend to work with both, as they each have their own specialty.

Wait, what? 100% retention rate!?

Yes — they never lose a client.

If a customer stops using the service, it’s because they went out of business, not because they switched vendors. This means they basically have the strongest retention rates a software company can achieve — implying customer lifetimes easily spanning 20 years or more.

That’s a hell of a moat, built on switching costs. Clients simply don’t leave.

Why not?

Because chip design companies cannot afford failure. A bad chip design could bankrupt a younger firm — or seriously damage a more mature one. And chip design isn’t exactly a walk in the park. It’s a complex, costly process involving thousands of hours spent fine-tuning workflows, integrating countless tools, and syncing processes across teams.

Switching to a different EDA platform would mean massive costs, serious risks, a productivity nosedive, and a nightmare of data migration challenges.

Oh, and by the way — the software costs are almost half the total cost of designing a chip. And chip design costs have skyrocketed (chart 2). From the 28nm node in 2011 to 3nm in 2022, the cost of designing a chip went up 12x.

So yeah — failure is not an option.

Thus, companies stick to the chip design software they know by heart — tools that fit them perfectly, with Cadence and Synopsys working hand-in-hand with their customers.

Their software is married into the workflow. And there’s no option for a divorce.

And that’s still not the end of the story.

Chart 2: Cost of Chip Design by Nanometer

Source: Quartr

Unprecedented Combination of Technology Drivers

So, Cadence und Synopsys are a dominant duopoly.

But are they also growing attractively?

Hell yeah!

The semiconductor industry is booming, fueled by an unprecedented combination of technology drivers across multiple sectors. Their major growth areas are (chart 3):

Data Science und Machine Learning
Industrial, Internet of Things
Hyperscale Computing
Autonomous Vehicles
5G Communications
Life Sciences

Chips — the most sold good in the world — are riding multiple growth waves, many of which are still just getting started. Think autonomous vehicles — still in their early innings.

The demand for EDA software is only going to accelerate.

Not only that — their client base is becoming much more diversified. 15 years ago, almost every Cadence und Synopsys client was a pure semiconductor company like Nvidia or Broadcom. Today, close to 45% are companies producing end products, not just chips — think again of Tesla.

Because of these major trends, the EDA business is projected to grow at 12–15% annually over the next decade. What we’re looking at is a significant structural growth trend — backed by asset-light, subscription based business models with gross margins in the high 80s and net income margins above 20%.

Let’s close the “Good Story” with André Kostolany’s famous words: “In a gold rush, don’t invest in the gold miners. Invest in the shovels.”

And Cadence und Synopsys are the ultimate shovel providers.

Now, let’s check out the “Good Chart.”

Chart 3: Major Electronics Industry Drivers

Source: Cadence Design Systems, Company Overview Presentation

The Trend Is Your Friend

Both EDA software businesses are riding a strong trend.

It’s a direct reflection of their sticky, subscription-based models — with high recurring revenue. Which means high visibility, stable cash flows, steady revenues, and reliable profits.

Of course, the market knows this.

And with several new growth pillars emerging recently, expectations have risen. Add to that the fact that chips are now arguably the most important good in the world — as highlighted in our book club read, “Chip War.”

Naturally, with loftier expectations and more geopolitical noise around semiconductors, price volatility has ticked up a bit.

But compared to other high-growth tech stocks, the tech sector overall, and even the broader semiconductor sector, the duopoly’s “Good Chart” is nothing short of impressive.

Let’s wrap this beautiful Friday morning up with another classic stock market saying:

The trend is your friend — until the end, when it bends.

Chart 4: Cadence und Synopsys over the last ten years