Cadence (CDNS) Surges 26.2% in a Year: Will the Trend Last?

Cadence Design Systems, Inc CDNS is continuing its upward trajectory, with a gain of 26.2% in the past year compared with the S&P 500 composite’s growth of 26.1%.

Based in San Jose, CA, Cadence is a leader in the electronic system design space. The company’s Intelligent System Design strategy aids users to transform design concepts into reality by offering computational software, hardware and IP. Cadence’s core electronic design automation software and services enable engineers to develop different types of ICs.

Solid financial performance is driving a good run on the trading front. The stock has gained 3.9% since announcing solid first-quarter 2024 results on Apr 22.

CDNS outpaced estimates in each of the trailing four quarters, delivering an earnings surprise of 3.5%, on average.

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Growth Catalysts

Accelerated design activity owing to transformative generational trends, such as generative AI, hyperscale computing, 5G and autonomous driving, is likely to boost the top line. Momentum in 3D-IC and chiplet designs bodes well.

Demand for CDNS’ hardware systems remains robust. In April 2024, the company unveiled the latest Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems. This is an advanced digital twin platform that is aimed at addressing the growing complexity of system and semiconductor design.

The latest systems offer more than double the capacity and a significant performance increase compared to Palladium Z2 and Protium X2 systems, highlighted Cadence. The Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems have been deployed to a few selected customers and were promoted by NVIDIA, AMD and Arm at launch.

Expansion of its well-established partnerships with strategic partners like NVIDIA, Arm and Intel is an advantage. Strengthening momentum in the uptake of solutions like Millennium supercomputing platform, Allegro X, Celsius Studio, Clarity 3D Solver, Cerebrus and Virtuoso Studio acts as an additional tailwind.

Synergies From Acquisitions

Strategic acquisitions have also played a pivotal role in propelling the top-line performance. In March 2024, Cadence inked an agreement to acquire a leading provider of engineering simulation solutions — BETA CAE Systems International AG. The acquisition will likely enhance Cadence's Intelligent System Design strategy by broadening its range of multiphysics system analysis offerings and helping Cadence enter into the structural analysis sector.

Multiphysics simulations are becoming important early in the design cycle due to growing system complexity and time-to-market challenges, which are driven by accelerated mechanical and electrical hyperconvergence and the digital revolution of numerous industries.

The deal involves Cadence paying approximately $1.24 billion, with 60% of the consideration in cash and 40% through the issue of Cadence stock to BETA CAE’s shareholders. The deal is expected to close in the second quarter of 2024, subject to regulatory approvals.

In January 2024, the company purchased California-based embedded software and system-level solutions provider Invecas, Inc. The Invecas buyout adds a skilled engineering team (based in Hyderabad, India), which will aid Cadence in offering its customers custom solutions across chip design, advanced packaging, product engineering and embedded software.

Apart from Invecas, CDNS also acquired Intrinsix to expand its footprint in the advanced nodes, radio frequency, mixed-signal and security algorithms’ space. The buyouts of Pointwise and NUMECA were also aimed at increasing the system analysis portfolio with more CFD solutions. OpenEye Scientific Software acquisition will aid in augmenting its reach in the pharmaceutical and biotechnology market.

Strong Liquidity Position

As of Mar 31, 2024, Cadence had cash and cash equivalents of approximately $1.01 billion. Long-term debt stood at $299.8 million. The strong cash balance can help the company to pursue strategic acquisitions and other investments in growth initiatives.

In the first quarter, it generated an operating cash flow of $253 million. Free cash flow was $204 million. The robust liquidity trends indicate that it is making investments in the right direction.

Strong cash flows help Cadence to continue its shareholder-friendly initiatives. A lesser number of outstanding shares helps the bottom line. It repurchased shares worth $125 million in the first quarter. The company expects to utilize 50% of the free cash flow to repurchase shares in 2024.

Headwinds Persist

Higher costs, stiff competition and soft global macroeconomic conditions remain concerns for this Zacks Rank #3 (Hold) stock.

Acquisitions have affected its balance sheet, as a high level of goodwill and intangible assets adds to the risk of investing in the company. CDNS’s goodwill and intangible assets totaled approximately $1.91 billion or 33.4% of total assets as of Mar 31, 2024.

Estimate Revision Activity

The Zacks Consensus Estimate for CDNS’ 2024 and 2025 revenues is pegged at $4.59 billion and $5.19 billion, indicating growth of 12.1% and 13.1% from the year-ago levels, respectively.

The consensus estimate for 2024 and 2025 EPS is expected to rise 15.2% and 17.6% from the prior-year actuals to $5.93 and $6.98, respectively.

The consensus mark for 2024 and 2025 EPS has remained unchanged in the past seven days.

CDNS’ long-term earnings growth rate is pegged at 17.1%.

Stocks to Consider

Some better-ranked stocks worth consideration in the broader technology space are Badger Meter BMI, Oracle ORCL and The Descartes Systems Group Inc DSGX. While BMI sports a Zacks Rank #1 (Strong Buy), ORCL and DSGX carry a Zacks Rank of 2 (Buy) each, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for BMI’s 2024 EPS is pegged at $3.89, up 9.9% in the past 60 days. BMI’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 12.7%. The long-term earnings growth rate is 15.6%. Shares of BMI have risen 40.3% in the past year.

The Zacks Consensus Estimate for Oracle’s fiscal 2025 EPS is pegged at $6.15. The long-term earnings growth rate is 9.7%. Oracle’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 3.6%. Shares of ORCL have risen 18.7% in the past year.

The Zacks Consensus Estimate for Descartes’ fiscal 2025 EPS has increased 1.2% in the past 60 days to $1.69. DSGX’s earnings beat the Zacks Consensus Estimate in two of the last four quarters, while missing in others, with the average surprise being 5.1%. Shares of DSGX have risen 27.5% in the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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