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Investing.com -- Morgan Stanley has replaced Arm with Cadence as its top pick in the semiconductor design and intellectual property sector, citing Cadence’s strong operating leverage, high recurring revenues, and record backlog.
“We prefer CDNS as a solid operating leverage story, with high recurring revenues and a record backlog positioning the company for higher growth,” Morgan Stanley (NYSE:MS) analysts said.
The semiconductor design and IP sector has faced significant declines since its peak in July 2024, as concerns about slowing AI-related spending, uncertain demand from China, and weak foundry adoption outside of TSMC have weighed on sentiment.
Despite these headwinds, Morgan Stanley believes the sector still offers long-term value, stating, “This fast-growing, AI-related sub-sector has been buffeted by fears of slowing spend, but this looks overdone and value can be seen.”
Arm has struggled with litigation risks, slower-than-expected adoption of its v9 architecture, and uncertainty around China’s demand.
While Morgan Stanley still sees value in Arm’s licensing model and potential shift to chipmaking, it has lowered its price target for the stock from $175 to $150, noting, “ARM has suffered from litigation risk, uncertain China demand and slow v9 expansion.”
Synopsys (NASDAQ:SNPS) remains on an Overweight rating but continues to be overshadowed by its pending acquisition of Ansys (NASDAQ:ANSS), according to the bank.
However, Morgan Stanley highlighted a potential long-term opportunity through Synopsys’ emerging AI-based engineering automation platform, AgentEngineer.
Looking ahead, Morgan Stanley expects 2025 to be a transition year for the sector but remains optimistic about growth in 2026 and beyond, citing improving China demand, AI sentiment recovery, and a better macroeconomic backdrop as potential upside drivers.
“Signs are emerging of a growing EDA market in 2026 and beyond,” analysts wrote.