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Cadence (CDNS) Tanks 9% in 6 Months: How to Play the Stock?
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Cadence Design Systems (CDNS - Free Report) stock has declined 8.7% in the past six months compared with the industry’s growth of 2.4%. The S&P 500 composite index has returned 11.3% in the same time frame and the Zacks Computer and Technology sector has jumped 13.1%.
It has also underperformed its peers in the EDA space. Keysight Technologies (KEYS - Free Report) shares have appreciated 1.5% in the last six months, while Synopsys (SNPS - Free Report) and ANSYS (ANSS - Free Report) shares have dropped 6% and 3.6%, respectively.
Image Source: Zacks Investment Research
Reasons Behind the Slump
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
Image Source: Zacks Investment Research
CDNS shares have also been declining as the company’s guidance for third-quarter revenues and earnings per share came in lower than expected despite positive business trends. The guidance is largely affected by the timing of Verification revenues and headwinds associated with China revenues.
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.
Estimates Southbound for Cadence
Given the headwinds surrounding the stock, earnings estimates have been southbound in the past 60 days. In the past 60 days, analysts have decreased their estimates for the current and current year by 11% and 1% to $1.44 and $5.87 per share, respectively.
Image Source: Zacks Investment Research
Strengthening Demand Trends
Strengthening demand trends for differentiated solutions, solid bookings and healthy backlog are key growth catalysts for CDNS.
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.
Synergies from acquisitions also bode well. In June 2024, Cadence completed the acquisition of Switzerland-based BETA CAE, a leading provider of engineering simulation solutions. The acquisition will enhance Cadence's Intelligent System Design strategy by broadening its multiphysics system analysis offerings and helping it enter into the structural analysis sector. In January 2024, the company purchased California-based embedded software and system-level solutions provider Invecas, Inc.
Revenues for 2024 are now projected to be 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 of BETA CAE.
Robust Design Activity
Design activity continues 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.
Expensive Valuation
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 0.42X, 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, long-term stakeholders and investors already owning the stock could stay put.
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Cadence (CDNS) Tanks 9% in 6 Months: How to Play the Stock?
Cadence Design Systems (CDNS - Free Report) stock has declined 8.7% in the past six months compared with the industry’s growth of 2.4%. The S&P 500 composite index has returned 11.3% in the same time frame and the Zacks Computer and Technology sector has jumped 13.1%.
It has also underperformed its peers in the EDA space. Keysight Technologies (KEYS - Free Report) shares have appreciated 1.5% in the last six months, while Synopsys (SNPS - Free Report) and ANSYS (ANSS - Free Report) shares have dropped 6% and 3.6%, respectively.
Image Source: Zacks Investment Research
Reasons Behind the Slump
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
Image Source: Zacks Investment Research
CDNS shares have also been declining as the company’s guidance for third-quarter revenues and earnings per share came in lower than expected despite positive business trends. The guidance is largely affected by the timing of Verification revenues and headwinds associated with China revenues.
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.
Estimates Southbound for Cadence
Given the headwinds surrounding the stock, earnings estimates have been southbound in the past 60 days. In the past 60 days, analysts have decreased their estimates for the current and current year by 11% and 1% to $1.44 and $5.87 per share, respectively.
Image Source: Zacks Investment Research
Strengthening Demand Trends
Strengthening demand trends for differentiated solutions, solid bookings and healthy backlog are key growth catalysts for CDNS.
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.
Synergies from acquisitions also bode well. In June 2024, Cadence completed the acquisition of Switzerland-based BETA CAE, a leading provider of engineering simulation solutions. The acquisition will enhance Cadence's Intelligent System Design strategy by broadening its multiphysics system analysis offerings and helping it enter into the structural analysis sector. In January 2024, the company purchased California-based embedded software and system-level solutions provider Invecas, Inc.
Revenues for 2024 are now projected to be 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 of BETA CAE.
Robust Design Activity
Design activity continues 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.
Expensive Valuation
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 0.42X, 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
Final Thoughts
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, long-term stakeholders and investors already owning the stock could stay put.