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There is a glut of semiconductors, so say bearish investors. They’re sort of right, yet it is not what you think. It is also the wrong way to look at the sector, and key businesses.

Executives at Advanced Micro Devices announced on Tuesday that year-over-year second quarter sales and profits jumped 70.9% and 41.2% respectively. However, an underwhelming Q3 outlook sent shares lower in afterhours trade.

Bears feel vindicated. Ignore them. Buy Cadence Design Systems (CDNS).

There is a lot to unpack. The semiconductor sector is at an inflection point, and it will never be the same again. The days are over of firms being stuck in their lanes, making generational microprocessors. Well, that is mostly true.

Intel (INTC) and Micron Technology (MU) make chips according to the old business model. They build huge quantities of plug-and-play silicon that software developers build code around. Unfortunately, this process makes those chips commodities. And make no mistake, there is a glut of these chips. The markets they serve were over-built during the pandemic.

Think about the millions of desktop and laptop computers that were bought to work from home.

That’s not the future of semiconductors. It has not been for a long time. Bears simply have not realized this, yet.

The best companies are now building chips around specific software needs. And that business is booming.

Apple (AAPL) may not be top of mind when it comes to semiconductors, yet software engineers at the Cupertino, Calif.-based company rolled up their sleeves and built the best custom silicon available in laptop and desktop computers. Alphabet (GOOGL) execs wanted a better chipset to run its complex AI algorithms, so the company continues to develop custom TPU chips. Amazon.com (AMZN) did the same for its network of data center servers. And the revolution does not end with non-traditional semiconductor firms.

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Forward-looking firms such as Qualcomm (QCOM), Marvell (MRVL), Broadcom (AVGO), and AMD are designing bespoke silicon to help other companies run specific software applications, according to a report at Digits and Dollars.

During her call with analysts Tuesday Lisa Su, AMD’s chief executive officer, said that its data center business is extremely strong, and there is no slowdown in sight. Sales for these chips in the quarter surged 83% year-over-year, to $1.5 billion.

AMD is also making good progress in its embedded segment, where sales in the quarter were $1.3 billion. This business serves clients in automotive, industrial, and advanced networking, like edge computing.

Cadence Design Systems makes software used by the semiconductor industry to design microprocessors, and help with software integration. The business is extremely profitable from the ground up. Current gross margins are 90%. Operating margins are 28%. And free cash flow is up 77% since 2020.

The San Jose, Calif.-based firm is capably led by Lip-Bu Tan, a graduate of the nuclear engineering program at MIT. Tan is also the founder of Walden International, a venture capital firm that makes early stage investments in chip design firms, a facility that serves Cadence well. Relationship Science, a Silicon Valley analytics firm, has consistently named Tan among the most connected executive in technology.

Cadence touches every part of the semiconductor sector, small and large. The company builds the software those businesses need to scale new processes, and to integrate with ever-evolving software applications.

I began recommending Cadence in 2017 when shares were only $25.60. Since that time shares have zoomed to $183.45, a sevenfold increase. These gains are certain to persist as the era of bespoke silicon leads to even more demand for design software.

It’s popular now to group all semiconductor companies in the same basket. Bears want to believe that a glut in the chips used in PCs translates to data centers and advanced networking. This simply is not so.

Investors should consider buying Cadence shares to take advantage of the important differences.

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