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Cadence Stock Down 16% in 3 Months: Should You Buy, Sell or Hold?
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Cadence Design Systems (CDNS - Free Report) stock has declined 15.8% in the past three months, underperforming its industry and the broader technology sector. Within the same time frame, the sub-industry and the Zacks Computer and Technology sector have declined 2.5% and 4.3%, respectively. It also lags the S&P 500’s growth of 2.4%.
Three-Month Price Performance
Image Source: Zacks Investment Research
CDNS shares have been declining as the company’s guidance for the current quarter revenues and earnings per share came in lower than anticipated despite positive business trends. The guidance is largely affected by the timing of Verification revenues and headwinds associated with China revenues.
This considerable decline in stock price has caught the attention of investors, prompting questions about whether to maintain their positions or cut their losses.
What Ails CDNS Stock?
The transition to next-generation Verification systems will weigh on the near-term revenues from the Functional Verification segment. CDNS launched new Verification hardware systems in April 2024. As a result, upfront revenues are expected to be skewed toward the second half of 2024 as the company works to build inventory of new systems.
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. Verification revenues are likely to pick up pace in 2025 once the company completes building inventory of its new systems.
Moreover, CDNS cut the full-year EPS outlook, 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.
Uncertainty prevailing over global macroeconomic conditions and substantial 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 from the likes of Keysight Technologies (KEYS - Free Report) , Synopsys (SNPS - Free Report) and ANSYS (ANSS - Free Report) are additional headwinds. The pending acquisition of ANSYS by Synopsys is likely to amp up competition in the EDA space for all players.
Cadence’s stock is trading at a premium with a forward 12-month Price/Earnings of 41.59X compared with the industry’s 32.56X. Though the lofty valuation reflects high expectations for future growth, the near-term prospects of the company remain somewhat muddled.
Image Source: Zacks Investment Research
CDNS’ technical indicators suggest that further downside could be ahead. The stock has been trading below both the 100-day and 200-day moving averages, indicating that investors may be losing confidence in the stock. High valuation and bearish technical indicators suggest that CDNS stock may face more volatility, at least in the near term.
Image Source: Zacks Investment Research
Estimates are Southbound for CDNS
Analysts are bearish about the stock, which is evident from the downward revision in earnings estimates.
Image Source: Zacks Investment Research
In the past 60 days, analysts have decreased their earnings estimates for the current quarter and current year by 11.1% and 1% to $1.44 and $5.87 per share, respectively. The estimate for the next year has also been revised downward by 1.2% to $6.90.
Cadence’s Long-Term Prospects Encouraging
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.
CDNS’ Inorganic Growth Strategy on Point
Acquisitions have played a pivotal role in driving topline expansion for CDNS. Last year, CDNS acquired Intrinsix Corporation and SerDes and memory interface PHY IP business from Rambus. In 2022, the company acquired four companies: OpenEye Scientific Software, Future Facilities, Pointwise and NUMECA.
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.
Accelerating Design Activity Bodes Well for CDNS
Design activity continues to be solid, owing to transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI. CDNS solutions are also witnessing strong adoption as system companies 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.
Should CDNS Stock be in Your Portfolio?
Strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives for Cadence but the external risks warrant caution in the near term. The company’s falling estimates and expensive valuation are concerning.
However, stakeholders and investors already owning the stock could stay put as long-term prospects for CDNS appear promising amid increasing design activity in the semiconductor space.
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Cadence Stock Down 16% in 3 Months: Should You Buy, Sell or Hold?
Cadence Design Systems (CDNS - Free Report) stock has declined 15.8% in the past three months, underperforming its industry and the broader technology sector. Within the same time frame, the sub-industry and the Zacks Computer and Technology sector have declined 2.5% and 4.3%, respectively. It also lags the S&P 500’s growth of 2.4%.
Three-Month Price Performance
Image Source: Zacks Investment Research
CDNS shares have been declining as the company’s guidance for the current quarter revenues and earnings per share came in lower than anticipated despite positive business trends. The guidance is largely affected by the timing of Verification revenues and headwinds associated with China revenues.
This considerable decline in stock price has caught the attention of investors, prompting questions about whether to maintain their positions or cut their losses.
What Ails CDNS Stock?
The transition to next-generation Verification systems will weigh on the near-term revenues from the Functional Verification segment. CDNS launched new Verification hardware systems in April 2024. As a result, upfront revenues are expected to be skewed toward the second half of 2024 as the company works to build inventory of new systems.
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. Verification revenues are likely to pick up pace in 2025 once the company completes building inventory of its new systems.
Moreover, CDNS cut the full-year EPS outlook, 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.
Uncertainty prevailing over global macroeconomic conditions and substantial 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 from the likes of Keysight Technologies (KEYS - Free Report) , Synopsys (SNPS - Free Report) and ANSYS (ANSS - Free Report) are additional headwinds. The pending acquisition of ANSYS by Synopsys is likely to amp up competition in the EDA space for all players.
CDNS' Premium Valuation & Bearish Technical Indicators
Cadence’s stock is trading at a premium with a forward 12-month Price/Earnings of 41.59X compared with the industry’s 32.56X. Though the lofty valuation reflects high expectations for future growth, the near-term prospects of the company remain somewhat muddled.
Image Source: Zacks Investment Research
CDNS’ technical indicators suggest that further downside could be ahead. The stock has been trading below both the 100-day and 200-day moving averages, indicating that investors may be losing confidence in the stock. High valuation and bearish technical indicators suggest that CDNS stock may face more volatility, at least in the near term.
Image Source: Zacks Investment Research
Estimates are Southbound for CDNS
Analysts are bearish about the stock, which is evident from the downward revision in earnings estimates.
Image Source: Zacks Investment Research
In the past 60 days, analysts have decreased their earnings estimates for the current quarter and current year by 11.1% and 1% to $1.44 and $5.87 per share, respectively. The estimate for the next year has also been revised downward by 1.2% to $6.90.
Cadence’s Long-Term Prospects Encouraging
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.
CDNS’ Inorganic Growth Strategy on Point
Acquisitions have played a pivotal role in driving topline expansion for CDNS. Last year, CDNS acquired Intrinsix Corporation and SerDes and memory interface PHY IP business from Rambus. In 2022, the company acquired four companies: OpenEye Scientific Software, Future Facilities, Pointwise and NUMECA.
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.
Accelerating Design Activity Bodes Well for CDNS
Design activity continues to be solid, owing to transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI. CDNS solutions are also witnessing strong adoption as system companies 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.
Should CDNS Stock be in Your Portfolio?
Strong end-market demand and opportunities presented by the rapid proliferation of AI applications are positives for Cadence but the external risks warrant caution in the near term. The company’s falling estimates and expensive valuation are concerning.
Consequently, it might not be a prudent investment decision to bet on the stock, which carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, stakeholders and investors already owning the stock could stay put as long-term prospects for CDNS appear promising amid increasing design activity in the semiconductor space.