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How Should You Play Cadence (CDNS) Stock Post Q2 Earnings?
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Cadence Design Systems (CDNS - Free Report) reported better than expected second-quarter 2024 results, driven by broad-based customer demand. Revenues of $1.061 billion increased 8.6%, while non-GAAP earnings per share (EPS) of $1.28 improved 4.9% on a year-over-year basis. The top and the bottom line also exceeded management’s guidance.
However, the company provided lower-than-expected guidance for the third quarter of 2024. It narrowed the guidance for 2024 EPS owing to the dilutive impact of the BETA CAE acquisition.
Key Growth Catalysts
Strengthening demand trends for differentiated solutions, solid bookings and healthy backlog are key growth catalysts for CDNS.
The company’s comprehensive suite of solutions rapidly reduces the time required to introduce a semiconductor product in the market.
Cadence noted that its latest hardware (Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems) solutions are likely to witness solid demand, especially by AI, hyperscale and automotive companies.
The Z3 and X3 platforms offer more than double the capacity and a significant performance increase from the prior generation. Leading tech firms like NVIDIA, ARM and AMD have also endorsed these systems.
Focus on AI Solutions
The company highlighted that the design activity continued to be robust owing to transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI. CDNS’ solutions are also witnessing rapid uptake as system companies continue to build their silicon amid increasing chip complexity.
Customers have been significantly increasing their R&D budgets in AI-driven automation. This bodes well for the Cadence.AI portfolio. CDNS remains focused on embedding cutting-edge AI capabilities across its SDA, EDA and digital biology offerings.
Subdued Outlook
Despite the positive trends, CDNS’ guidance for third-quarter revenues and earnings per share came in lower than expected.
Management noted that the ‘shape of the revenue curve’ is driving the guidance. It does not expect massive revenue growth in the Verification business in 2024 but it will be an improved performance over 2023. Owing to the April 2024 launch of new hardware systems, upfront revenues are expected to be skewed toward the second half of 2024 as CDNS works to build inventory of new systems.
Owing to the dilutive impact of 12 cents of the BETA CAE acquisition, non-GAAP earnings per share for the full year are expected to be between $5.77 and $5.97 compared with the previous guidance of $5.88 and $5.98.
Revenues for 2024 are projected in the range of $4.6-$4.66 billion compared with the previous guidance of $4.56-$4.62 billion. It includes $40 million in revenues (at the midpoint) from the acquisition.
Ongoing uncertainty prevailing over global macroeconomic conditions and significant exposure to the semiconductor vertical is concerning. Any reduction in R&D spending for companies within the semiconductor sector could affect CDNS' performance. Higher operating costs and stiff competition in the EDA space are additional headwinds.
In the last reported quarter, total non-GAAP costs and expenses increased 11.6% year over year to $635 million. Non-GAAP gross margin contracted 290 basis points (bps) to 88.5%. Non-GAAP operating margin contracted 170 bps on a year-over-year basis to 40.1%.
Image Source: Zacks Investment Research
Price Performance & Valuation
The CDNS stock has lost 1.8% on a year-to-date basis compared with its industry’s 11.2% growth. The S&P 500 composite index has risen 14.1% in the same time frame and the Zacks Computer and Technology sector has jumped 18.7%.
Image Source: Zacks Investment Research
Looking at other players' performance in the EDA space, Synopsys (SNPS - Free Report) shares have appreciated 7.5% year to date, while Keysight Technologies (KEYS - Free Report) and ANSYS (ANSS - Free Report) shares have dropped 14.5% and 14.4%, 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 0.41X, 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 0.32X.
While strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives, external risks remain overhangs. 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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How Should You Play Cadence (CDNS) Stock Post Q2 Earnings?
Cadence Design Systems (CDNS - Free Report) reported better than expected second-quarter 2024 results, driven by broad-based customer demand. Revenues of $1.061 billion increased 8.6%, while non-GAAP earnings per share (EPS) of $1.28 improved 4.9% on a year-over-year basis. The top and the bottom line also exceeded management’s guidance.
However, the company provided lower-than-expected guidance for the third quarter of 2024. It narrowed the guidance for 2024 EPS owing to the dilutive impact of the BETA CAE acquisition.
Key Growth Catalysts
Strengthening demand trends for differentiated solutions, solid bookings and healthy backlog are key growth catalysts for CDNS.
The company’s comprehensive suite of solutions rapidly reduces the time required to introduce a semiconductor product in the market.
Cadence noted that its latest hardware (Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems) solutions are likely to witness solid demand, especially by AI, hyperscale and automotive companies.
The Z3 and X3 platforms offer more than double the capacity and a significant performance increase from the prior generation. Leading tech firms like NVIDIA, ARM and AMD have also endorsed these systems.
Focus on AI Solutions
The company highlighted that the design activity continued to be robust owing to transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI. CDNS’ solutions are also witnessing rapid uptake as system companies continue to build their silicon amid increasing chip complexity.
Customers have been significantly increasing their R&D budgets in AI-driven automation. This bodes well for the Cadence.AI portfolio. CDNS remains focused on embedding cutting-edge AI capabilities across its SDA, EDA and digital biology offerings.
Subdued Outlook
Despite the positive trends, CDNS’ guidance for third-quarter revenues and earnings per share came in lower than expected.
Management noted that the ‘shape of the revenue curve’ is driving the guidance. It does not expect massive revenue growth in the Verification business in 2024 but it will be an improved performance over 2023. Owing to the April 2024 launch of new hardware systems, upfront revenues are expected to be skewed toward the second half of 2024 as CDNS works to build inventory of new systems.
Owing to the dilutive impact of 12 cents of the BETA CAE acquisition, non-GAAP earnings per share for the full year are expected to be between $5.77 and $5.97 compared with the previous guidance of $5.88 and $5.98.
Revenues for 2024 are projected in the range of $4.6-$4.66 billion compared with the previous guidance of $4.56-$4.62 billion. It includes $40 million in revenues (at the midpoint) from the acquisition.
Ongoing uncertainty prevailing over global macroeconomic conditions and significant exposure to the semiconductor vertical is concerning. Any reduction in R&D spending for companies within the semiconductor sector could affect CDNS' performance. Higher operating costs and stiff competition in the EDA space are additional headwinds.
In the last reported quarter, total non-GAAP costs and expenses increased 11.6% year over year to $635 million. Non-GAAP gross margin contracted 290 basis points (bps) to 88.5%. Non-GAAP operating margin contracted 170 bps on a year-over-year basis to 40.1%.
Image Source: Zacks Investment Research
Price Performance & Valuation
The CDNS stock has lost 1.8% on a year-to-date basis compared with its industry’s 11.2% growth. The S&P 500 composite index has risen 14.1% in the same time frame and the Zacks Computer and Technology sector has jumped 18.7%.
Image Source: Zacks Investment Research
Looking at other players' performance in the EDA space, Synopsys (SNPS - Free Report) shares have appreciated 7.5% year to date, while Keysight Technologies (KEYS - Free Report) and ANSYS (ANSS - Free Report) shares have dropped 14.5% and 14.4%, 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 0.41X, 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 0.32X.
Image Source: Zacks Investment Research
Wrapping Up
As Cadence carries a Zacks Rank #3 (Hold), a nuanced approach is needed while dealing with this stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives, external risks remain overhangs. 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.