Trump Administration Targets Chip Design Software Exports to China, Impacting Cadence and Synopsys

Why Cadence Design Systems Plunged Late in the Day Today | The Motley Fool

Cadence is just one of a handful of companies that makes the software semiconductor designers use to design chips. With the increasing variety of chips and number of chipmakers proliferating over the past decade, it has been an excellent business. However, a Financial Times article published late Wednesday said that the Trump administration may cut off these companies' Chinese revenues. Late on Wednesday, the Financial Times said the Trump administration's Commerce Department has instructed Cadence, along with its oligopoly competitors Synopsis and Siemens EDA, to stop selling their software to China. The past couple of presidential administrations have been grappling with how to slow China's advances in artificial intelligence (AI) technology, without hurting U.S.-based chipmakers that also sell into China's massive market. Past administrations have already cut off the most advanced semiconductor manufacturing equipment to China, but if the FT article is correct, it appears the Trump administration may be attempting to cut the leading chip design software technologies off as well. In its most recent annual report, Cadence stated that China made up about 12% of its revenue, down from 17% in the prior year. So, it's perhaps no wonder Cadence's stock is down by roughly the same percentage today. It's hard to draw conclusions from this late-day FT piece, but it appears that the market may already be pricing in a worst-case scenario already, given the sudden double-digit decline. That said, Cadence was an expensive stock to begin with, as shares were trading at 82 times trailing and 47 times forward earnings coming into the day. As is the case with most leading chipmakers and semiconductor-oriented names, these are generally high-quality businesses with strong growth outlooks on the back of the AI boom; however, that means they are also vulnerable to geopolitics. It makes for a volatile brew. That being said, Foolish investors shouldn't shy away from chip stocks, as semis have been the best-performing sector over the past decade.

Chip software in Washington's sights

Shares in software developers for chip design fell sharply yesterday. The Trump administration wants to restrict exports to China. Cadence Design and Synopsis are directly affected. The shock was triggered by a new round of regulations: the Trump administration has asked several chip design software (EDA) suppliers to suspend exports to China. The escalation is quite sudden, as Sino-US negotiations on tariffs seemed to be reaching a fairly positive conclusion. Yet Donald Trump seems to blame China for the slow progress of trade negotiations. Chinese President Xi Jinping is playing for time and stepping up talks with other countries to reduce Beijing's dependence on the US for exports. It would therefore come as no surprise if Donald Trump announced a drastic measure, such as the 50% tariffs imposed on the EU - and then lifted it the next day - in an attempt to push things forward as he sees fit. The Bureau of Industry and Security (BIS), a strategic body within the Department of Commerce, has reportedly sent letters to several companies - including Synopsys, Cadence, and Siemens - informing them of a partial freeze on deliveries to Chinese customers, according to sources cited by the Wall Street Journal. Synopsys derives 16% of its revenue from China, Cadence 12%. This is a relative dependency, but Synopsys, Cadence Design, and Siemens AG together account for 80% of the Chinese design software market, with these two US companies alone accounting for 70%. This software is known as EDA (Electronic Design Automation). Amongst other things, it is used to create the most advanced architectures, such as processors for Apple and Nvidia, as well as chips for aerospace and 6G. Synopsys CEO Sassine Ghazi sought to reassure the public: "We have not received any formal notification from the BIS." Cadence, for its part, remains silent. The group recently raised its 2025 revenue forecast (to between $5.15bn and $5.23bn), supported by demand for AI, high-performance computing, and the growing adoption of its hardware systems. On the New York Stock Exchange yesterday, Cadence Design and Synopsys lost 10.7% and 9.6% of their market capitalization, respectively.