In the video clip below from a recent episode of The AI Investor Podcast from 24/7 Wall St., the team discusses Synopsys (NASDAQ: SNPS), a company that may not be a household name but holds a significant position in the technology sector.

Synopsys specializes in electronic design automation (EDA) software, which is essential for chip design—a field experiencing substantial growth as more companies venture into creating their own semiconductors.

Fifteen years ago, 100% of Synopsys’s revenue came from semiconductor companies. Today, that figure is less than half, largely because eight of the ten largest companies globally are now designing their own chips.

This expansion has broadened Synopsys’s customer base, enhancing its growth opportunities. The company enjoys a “Coke and Pepsi” competitive dynamic with its closest rival, Cadence Design Systems, which further solidifies its market position.

We believe that artificial intelligence (AI) is a significant additive to Synopsys’s revenue rather than a threat, as AI technologies increasingly rely on advanced chip designs that require sophisticated EDA tools.

While Synopsys has strong fundamentals and promising growth prospects, its valuation has been a point of caution. However, with the stock price experiencing a slight decline recently, we see this as an opportune moment to initiate a position.  This initial investment leaves room for us to increase our stake if the stock price falls further, allowing us to capitalize on potential undervaluation.

Additionally, we are considering diversifying within the EDA space by potentially investing in Cadence Design Systems, given its comparable market position. Beyond semiconductors, our portfolio strategy includes exploring software plays in various sectors such as business intelligence, cybersecurity, and companies with dominant positions like Meta Platforms.

We are particularly interested in software investments because they offer robust growth potential and align with emerging technological trends. Our aim is to build a diversified portfolio that captures opportunities across different areas of the tech industry, rather than concentrating solely on semiconductors.

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