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Should You Buy Cadence (CDNS) Stock Ahead of Q2 Earnings?
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Cadence Design Systems, Inc (CDNS - Free Report) is scheduled to release second-quarter 2024 results on Jul 22. The Zacks Consensus Estimate for second-quarter 2024 earnings has been unchanged in the past 60 days and is pegged at $1.23 per share. The consensus mark implies a marginal increase of 0.8% from the year-ago actual. The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $1.05 billion, suggesting a 7.4% uptick from the year-ago actual.
CDNS Estimate Trend
Image Source: Zacks Investment Research
Cadence has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in the trailing four quarters, the average beat being 3.5%.
Image Source: Zacks Investment Research
What Our Model Predicts for Q2
Our proven model does not conclusively predict an earnings beat for Cadence this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Design activity has been robust due to transformative generational trends, such as artificial intelligence (AI), hyperscale computing, 5G and autonomous driving. Customers have been significantly increasing their R&D budgets in AI-driven automation. This bodes well for Cadence.
The System Design and Analysis division is likely to have gained from increasing demand for solutions like Millennium supercomputing platform, Allegro X, Celsius Studio and Clarity 3D Solver. Our estimate for revenues from System Design and Analysis is pegged at $136 million, indicating year-over-year growth of 7.2%.
Increasing system design complexity is likely to have driven the verification business performance. Our estimate for revenues from the Functional Verification, including the Emulation and Prototyping Hardware segment, is pegged at $261.8 million. Demand for the company’s hardware solutions (such as Palladium Z2 and Protium X2 systems) has been strong, particularly with hyperscalers.
The launch of Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems in April 2024 is likely to have aided the company’s hardware sales.
Cadence’s Digital IC Design and Signoff business performance is expected to have been driven by the steady adoption of digital full-flow solutions. Our estimate for revenues from the Digital IC Design and Signoff segment is pegged at $285.3 million, implying year-over-year growth of 8.2%.
The Custom IC business segment is likely to have gained from increasing demand for Virtuoso Studio. We expect revenues from this business to rise 6.8% year over year to $229.4 million in the second quarter.
Opportunities presented by AI and multi-chiplet-based architectures are likely to have cushioned the performance of the IP business division. We expect revenues to rise 22.7% to $131.8 million on a year-over-year basis in the to-be-reported quarter.
Backed by strong demand trends, management expects revenues of $1.03-$1.05 billion. The company reported sales of $977 million in the year-ago quarter. Non-GAAP earnings per share for second-quarter 2024 are anticipated between $1.20 and $1.24. CDNS reported an EPS of $1.22 in the year-ago quarter. The non-GAAP operating margin is estimated to be 38.5-39.5% for the second quarter.
However, Cadence highlighted that due to the launch of hardware systems in April 2024, hardware revenues would be skewed toward the second half of 2024 as it works to build inventory of the new systems.
Ongoing uncertainty prevailing over global macroeconomic conditions and inflation is concerning. Higher operating costs are added woes. In the last reported quarter, total non-GAAP costs and expenses increased 6.1% year over year to $627 million.
Moreover, Cadence faces stiff competition in the electronic design automation space. Intensifying competition negatively impacts pricing power, which keeps margins under pressure.
Price Performance & Valuation
Despite a steady financial performance, the stock has performed less impressively on the trading front than its industry’s performance. The CDNS stock has appreciated 5.8% on a year-to-date basis compared with its industry’s 14.3% growth. The S&P 500 composite index has risen 16.1% in the same time frame and the Zacks Computer and Technology sector has jumped 21.5%.
Image Source: Zacks Investment Research
Looking at other players' performance in the EDA space, Synopsys (SNPS - Free Report) shares have appreciated 10.8% year to date, while Keysight Technologies (KEYS - Free Report) and ANSYS (ANSS - Free Report) shares have nosedived 8.5% and 11.7%, respectively.
From a valuation perspective, CDNS is trading at a relatively expensive level. Going by its forward 12-month price-to-earnings ratio, Cadence is trading at a multiple of 0.45X, below its median of 0.54X over the last five years. The company is trading at a premium compared with the industry’s ratio of 0.33X.
Image Source: Zacks Investment Research
Investment Thesis
Demand for hardware systems is likely to get a boost from the launch of the latest Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems. The latest systems offer more than double the capacity and a significant performance increase from the prior generation.
Recently, Cadence acquired BETA CAE Systems International AG. The acquisition will likely enhance its Intelligent System Design strategy by broadening its range of multiphysics system analysis offerings.
Despite all this, we do not think that it is worth buying the stock at the moment amid certain headwinds.
Increasing costs amid soft global macroeconomic conditions, along with stiff competition, are concerning. Cadence generates a significant portion of its revenues from the international market. In 2023, the company derived 41.4% of its revenues from the United States, whereas the balance 58.6% came from its international operations. Hence, we expect any adverse foreign currency exchange movement to impede top-line expansion.
End Note
While strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives, external risks warrant a careful approach. Consequently, it might not be a prudent investment decision to bet on the stock at the moment.
However, a single quarter’s results are not that important for long-term stakeholders and investors already owning the stock could stay put.
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Should You Buy Cadence (CDNS) Stock Ahead of Q2 Earnings?
Cadence Design Systems, Inc (CDNS - Free Report) is scheduled to release second-quarter 2024 results on Jul 22. The Zacks Consensus Estimate for second-quarter 2024 earnings has been unchanged in the past 60 days and is pegged at $1.23 per share. The consensus mark implies a marginal increase of 0.8% from the year-ago actual. The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $1.05 billion, suggesting a 7.4% uptick from the year-ago actual.
CDNS Estimate Trend
Image Source: Zacks Investment Research
Cadence has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in the trailing four quarters, the average beat being 3.5%.
Image Source: Zacks Investment Research
What Our Model Predicts for Q2
Our proven model does not conclusively predict an earnings beat for Cadence this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
CDNS has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors to Focus Ahead of Q2 Earnings
Design activity has been robust due to transformative generational trends, such as artificial intelligence (AI), hyperscale computing, 5G and autonomous driving. Customers have been significantly increasing their R&D budgets in AI-driven automation. This bodes well for Cadence.
The System Design and Analysis division is likely to have gained from increasing demand for solutions like Millennium supercomputing platform, Allegro X, Celsius Studio and Clarity 3D Solver. Our estimate for revenues from System Design and Analysis is pegged at $136 million, indicating year-over-year growth of 7.2%.
Increasing system design complexity is likely to have driven the verification business performance. Our estimate for revenues from the Functional Verification, including the Emulation and Prototyping Hardware segment, is pegged at $261.8 million. Demand for the company’s hardware solutions (such as Palladium Z2 and Protium X2 systems) has been strong, particularly with hyperscalers.
The launch of Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems in April 2024 is likely to have aided the company’s hardware sales.
Cadence’s Digital IC Design and Signoff business performance is expected to have been driven by the steady adoption of digital full-flow solutions. Our estimate for revenues from the Digital IC Design and Signoff segment is pegged at $285.3 million, implying year-over-year growth of 8.2%.
The Custom IC business segment is likely to have gained from increasing demand for Virtuoso Studio. We expect revenues from this business to rise 6.8% year over year to $229.4 million in the second quarter.
Opportunities presented by AI and multi-chiplet-based architectures are likely to have cushioned the performance of the IP business division. We expect revenues to rise 22.7% to $131.8 million on a year-over-year basis in the to-be-reported quarter.
Backed by strong demand trends, management expects revenues of $1.03-$1.05 billion. The company reported sales of $977 million in the year-ago quarter. Non-GAAP earnings per share for second-quarter 2024 are anticipated between $1.20 and $1.24. CDNS reported an EPS of $1.22 in the year-ago quarter. The non-GAAP operating margin is estimated to be 38.5-39.5% for the second quarter.
However, Cadence highlighted that due to the launch of hardware systems in April 2024, hardware revenues would be skewed toward the second half of 2024 as it works to build inventory of the new systems.
Ongoing uncertainty prevailing over global macroeconomic conditions and inflation is concerning. Higher operating costs are added woes. In the last reported quarter, total non-GAAP costs and expenses increased 6.1% year over year to $627 million.
Moreover, Cadence faces stiff competition in the electronic design automation space. Intensifying competition negatively impacts pricing power, which keeps margins under pressure.
Price Performance & Valuation
Despite a steady financial performance, the stock has performed less impressively on the trading front than its industry’s performance. The CDNS stock has appreciated 5.8% on a year-to-date basis compared with its industry’s 14.3% growth. The S&P 500 composite index has risen 16.1% in the same time frame and the Zacks Computer and Technology sector has jumped 21.5%.
Image Source: Zacks Investment Research
Looking at other players' performance in the EDA space, Synopsys (SNPS - Free Report) shares have appreciated 10.8% year to date, while Keysight Technologies (KEYS - Free Report) and ANSYS (ANSS - Free Report) shares have nosedived 8.5% and 11.7%, respectively.
From a valuation perspective, CDNS is trading at a relatively expensive level. Going by its forward 12-month price-to-earnings ratio, Cadence is trading at a multiple of 0.45X, below its median of 0.54X over the last five years. The company is trading at a premium compared with the industry’s ratio of 0.33X.
Image Source: Zacks Investment Research
Investment Thesis
Demand for hardware systems is likely to get a boost from the launch of the latest Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems. The latest systems offer more than double the capacity and a significant performance increase from the prior generation.
Recently, Cadence acquired BETA CAE Systems International AG. The acquisition will likely enhance its Intelligent System Design strategy by broadening its range of multiphysics system analysis offerings.
Despite all this, we do not think that it is worth buying the stock at the moment amid certain headwinds.
Increasing costs amid soft global macroeconomic conditions, along with stiff competition, are concerning. Cadence generates a significant portion of its revenues from the international market. In 2023, the company derived 41.4% of its revenues from the United States, whereas the balance 58.6% came from its international operations. Hence, we expect any adverse foreign currency exchange movement to impede top-line expansion.
End Note
While strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives, external risks warrant a careful approach. Consequently, it might not be a prudent investment decision to bet on the stock at the moment.
However, a single quarter’s results are not that important for long-term stakeholders and investors already owning the stock could stay put.