Cadence Design Systems CDNS has faced a challenging start to 2025, with shares sliding 10.4% year to date, underperforming the Computer Software industry, the broader technology sector and the S&P 500 composite. Within the same time frame, the Computer Software industry, the Zacks Computer and Technology sector and the S&P 500 have registered declines of 5.9%, 6% and 2.3%, respectively.

Price Performance

Image Source: Zacks Investment Research

The stock is trading below its 50-day moving average, indicating bearish sentiment among investors. The stock is now trading at $269.11, down 18.2% from its 52-week high of $328.99. Investors must be contemplating how to play this stock going forward.

Concerns Around CDNS Growth Deceleration

CDNS provided soft guidance for 2025, leading to a downward pressure on the stock price, which has declined 10.4% since reporting results on Feb. 18. For 2024, CDNS reported revenue and EPS growth of 13.5% and 15.9%. However, for 2025, revenues are expected to increase in the range of 11-12%, while non-GAAP EPS growth is projected to be 12%.

Image Source: Zacks Investment Research

Apart from that, weakness 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' topline performance.

Higher operating costs and stiff competition in the EDA/AI space from the likes of Keysight Technologies KEYS, Synopsys SNPS and ANSYS ANSS are additional headwinds. The pending acquisition of ANSYS by Synopsys is likely to intensify competition in the EDA space for all players.

Analysts seem bearish are bearish about the stock, which is evident from the downward revision in earnings estimates. In the past 60 days, analysts have decreased their earnings estimates for the current quarter by 5.1% to $1.49.

Image Source: Zacks Investment Research

CDNS' Premium Valuation

Cadence’s stock is trading at a premium, with a forward 12-month Price/Earnings of 38.87X compared with the industry’s 28.5X. 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 Business Fundamentals Appear Strong

Broad-based demand for its solutions amid robust design activity is a key catalyst. The global shift towards advanced technologies like AI, 5G and autonomous vehicles is likely to serve as a tailwind for Cadence, which is well-positioned to benefit from these trends. Going ahead, the company is likely to benefit from customers increasing their R&D spending in artificial intelligence (AI) driven automation. 

CDNS highlighted that the AI super cycle was now entering a new phase. The focus on Generative AI, Agentic AI and Physical AI is leading to an exponential increase in computing demand and semiconductor innovation. It has been collaborating with several tech giants, including Qualcomm and NVIDIA, on their next-generation AI designs across both training and inferencing. It is eyeing new AI markets like Life Sciences through its OpenEye drug discovery software. The company is also expanding partnerships with its foundry partners like Taiwan Semiconductor Manufacturing, Intel and Arm Holdings.

The verification business is gaining traction due to the rising complexity of system verification and software bring-up. 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 with Palladium Z2 and Protium X2 systems. In 2024, hardware solutions added more than 30 customers and almost 200 repeat customers, especially among AI and hyperscale clients.

What to do With CDNS Stock?

With exposure to high-growth areas like AI and machine learning, Cadence seems to be well-positioned to benefit from future industry trends. While CDNS delivered strong growth in 2024, several potential risks could exert downward pressure on its stock. Macroeconomic and geopolitical uncertainties, particularly in China, competitive pressures and significant exposure to semiconductor verticals, all pose significant challenges.

The potential for margin compression due to high investments in AI and research and development further adds to investors’ concerns. Non-GAAP operating margin is estimated to be between 40% and 41% for the first quarter of 2025, while CDNS reported an operating margin of 46% in the fourth quarter of 2024.

To conclude, investors interested in CDNS stock should wait for a better entry point as the stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Synopsys, Inc. (SNPS) : Free Stock Analysis Report

Cadence Design Systems, Inc. (CDNS) : Free Stock Analysis Report

ANSYS, Inc. (ANSS) : Free Stock Analysis Report

Keysight Technologies Inc. (KEYS) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research