One of Japan's largest technology manufacturers is making a strong move into the software industry. There is a brewing battle in an overlooked segment of the artificial intelligence (AI) sector: chip design software. Several merger and acquisition deals have been announced, with a pending mega-merger between leading electronic design automation (EDA) company Synopsys (SNPS 1. 47%) and Ansys (ANSS 0. 20%). Shortly after, another EDA software provider Cadence Design Systems (CDNS 0. 50%) unveiled its new supercomputing platform for simulating electronic systems. Not wanting to be left behind, Japanese chip manufacturer Renesas (RNECY 2. 81%) announced its intention to acquire smaller EDA software provider Altium (ALMF. F 0. 58%). Is there a significant development in the AI market? Renesas seeks a boost in software Renesas is an integrated device manufacturer involved in both semiconductor design and manufacturing. This hybrid business model has been gaining momentum in recent years. Alongside Japan's rise as a prominent manufacturing hub in the East, Renesas owes its resurgence to the electric vehicle (EV) revolution and various mature manufacturing processes (excluding cutting-edge chips for applications like data center AI) used in industrial and power sectors. Apart from smaller acquisitions to strengthen its power chip portfolio, last year I discussed Renesas' deal with Wolfspeed (WOLF -2. 81%) to acquire silicon carbide (SiC) wafers for next-gen applications such as EV motors. However, the acquisition of Altium, a small competitor to EDA software giants Synopsys and Cadence, presents a distinct scenario.

Despite generating only $139 million in revenue in the first half of its fiscal year 2024, Australia-based Altium (notably, a chip design customer of Wolfspeed) commands a hefty price tag of A$9. 1 billion ($6 billion in USD, based on April 5, 2024, exchange rates). Renesas justifies this hefty price by aiming to enhance its software and digital tool capabilities for clients, particularly non-tech customers (e. g. , automakers) who may require assistance in implementing next-generation electronics. Is there a wave of AI on the horizon? Currently, Nvidia's (NVDA 2. 45%) data center AI systems are in high demand as companies explore ways to utilize their data for training new AI systems. However, in the coming decade, there will be a need to house all these AI systems to fully benefit from their capabilities. This is where Renesas likely envisions a tremendous opportunity by acquiring Altium and competing with Synopsys and Cadence in electronic system design. Semiconductor manufacturers have a pathway to sustained growth due to customer interest in embedding intelligent computing systems across a wide range of devices, from automobiles to automated factory equipment to smart home devices. The new wave of AI integrated within devices themselves, instead of residing in data centers, will require more advanced hardware. Energy-efficient hardware, like what Renesas has been developing (including the Wolfspeed agreement), will also be essential. By combining not only the chips but also the software, Renesas could secure its position in the market for years to come, making AI-driven devices a reality. Renesas might be an unrecognized growth stock in the AI race. With shares trading at approximately 13 times trailing 12-month earnings and free cash flow, it could be a potential bargain if it continues to advance its semiconductor manufacturing and design business for autos, industrial equipment, and consumer electronics.