Yahoo Finance Cadence (CDNS) Stock Gains 67% YTD: Will the Uptrend Last?
Cadence Design Systems CDNS is witnessing strong momentum, with shares having rallied 67% year to date compared with 51.7% and 18.5% growth of the sub-industry and S&P Composite, respectively.
With healthy fundamentals and strong growth opportunities, this Zacks Rank #2 (Buy) stock appears to be a solid investment option at the moment.
Apart from a favorable rank, CDNS has a Growth Score of B. Per Zacks proprietary methodology, stocks with a combination of a Zacks Rank #1 (Strong Buy) or #2 and a VGM Score of A or B offer solid investment opportunities.
Based in San Jose, CA, Cadence offers products and tools that help customers to design electronic products. Its core electronic design automation software and services enable engineers to develop different types of ICs.
The company is focused on providing end-to-end solutions, which rapidly reduces the time required to introduce a semiconductor product in the market. It is experiencing strong demand for its software – particularly verification and digital design products – from customers providing datacenter servers, networking products and smartphones that continues to invest in new design concepts and projects.
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Catalysts Driving Growth
Cadence’s stock price is being driven by healthy demand for its diversified product portfolio across all segments.
Owing to strong momentum, CDNS reported robust results for third-quarter 2023. It delivered non-GAAP earnings of $1.26 per share, which beat the Zacks Consensus Estimate by 4.1% and jumped 18.9% year over year. Revenues of $1.023 billion surpassed the Zacks Consensus Estimate by 1.7% and rose 13.3% on a year-over-year basis.
Management raised full-year guidance on the back of strong quarterly results. It highlighted that design activity continued to be solid due to transformative generational trends such as AI, hyperscale computing, 5G and autonomous driving. Management also noted that there is an increase in production of 3D-IC and chiplet designs, and more system companies are now building custom silicon, which bodes well.
Cadence added that its comprehensive JedAI Generative AI platform was witnessing continued traction, with sales of its GenAI solutions having nearly tripled in the last year.
Revenues for 2023 are now projected in the range of $4.06-$4.1 billion. Earlier, management had suggested revenues in the $4.05-$4.09 billion band.
Non-GAAP earnings for 2023 are now expected to be between $5.07 per share and $5.13 per share. Earlier, non-GAAP earnings were anticipated in the range of $5.05-$5.11 per share.
Apart from frequent product launches, momentum for existing products also augurs well. Among them, Palladium and Protium (especially Z2 and X2) along with AI-powered Cadence Cerebrus and Virtuoso Studio solutions are witnessing healthy uptake.
The company added that Nisshinbo Micro Devices has utilized various Cadence tools, including AI-driven Virtuoso Studio custom IC design platform and Clarity 3D Solver, to enhance design efficiency and ensure consistent product delivery to the market.
Strategic acquisitions have also aided CDNS’ top-line growth. In October 2023, it completed the acquisition of Intrinsix Corporation from CEVA. Intrinsix is a leading provider of design engineering solutions for the U.S. aerospace and defense industry.
It also acquired Rambus SerDes and memory interface PHY IP business from Rambus earlier in the year. The buyout will help CDNS to extend its reach across geographies and key vertical markets. Other notable acquisitions in the recent past include OpenEye Scientific Software, Future Facilities, Pointwise and NUMECA.
A strong cash position is an added plus. As of Sep 30, 2023, CDNS had cash and cash equivalents of $962 million compared with $874 million as of Jun 30, 2023. The long-term debt was $648.8 million as of Sep 30, 2023.
In the third quarter, Cadence generated operating cash flow of $396 million. Free cash flow was $374 million. Strong cash flows help Cadence to continue shareholder-friendly initiatives.
The company repurchased shares worth approximately $185 million in the third quarter. In 2022, it repurchased shares worth $1.05 billion. Management intends to buy back worth approximately $125 million in the fourth quarter of 2023.
However, higher costs related to R&D are likely to dent margins in the near term. Stiff competition and volatile macroeconomic conditions continue to be concerns.
A Look at Estimates
Cadence’s earnings per share are envisioned to climb 19.7% and 13.4% on a year-over-year basis to $5.11 and $5.79 in 2023 and 2024, respectively. The Zacks Consensus Estimate for 2023 and 2024 earnings has improved 0.4% and 0.9%, respectively, in the past 60 days.
Revenues for 2023 and 2024 are forecast to rise 14.8% and 10.9% to $4.09 billion and $4.53 billion, respectively.
Other Stocks to Consider
Some other top-ranked stocks worth consideration in the broader technology space are Adobe ADBE, Synopsys SNPS and Watts Water Technologies WTS, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Adobe’s fiscal 2023 EPS has increased by 0.1% in the past 60 days to $15.93. ADBE’s long-term earnings growth rate is 13.5%.
Adobe’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 3.3%. Shares of ADBE have climbed 87.5% in the past year.
The Zacks Consensus Estimate for Synopsys’ fiscal 2024 EPS has remained flat in the past 30 days at $12.52. SNPS’ long-term earnings growth rate is 16.7%. Shares of SNPS have gained 64.6% in the past year.
The Zacks Consensus Estimate for Watts Water Technologies 2023 EPS has improved 2.8% in the past 60 days to $8.00.
WTS’ earnings outpaced the Zacks Consensus Estimate in each of the last four quarters, the average earnings surprise being 11.8%. Shares of WTS have surged 23.7% in the past year.
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