Shares of Cadence Design Systems CDNS have risen 12.3% in the past month, compared with the sub-industry and the Zacks Computer and Technology sector’s returns of 4.7% and 3.4%, respectively. The S&P 500 Index has returned 3.2% in the same period.

The stock has also outperformed its peers. In the past month, shares of Synopsys, Inc SNPS and ANSYS Inc ANSS have gained 5.9% and 3.6%, respectively, while Keysight Technologies, Inc KEYS has lost 2.8%. 

One-Month Price Performance

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CDNS’ technical indicators suggest that there could be further upside. The stock has been trading above both the 50-day and 100-day moving averages, indicating that investors are bullish on the stock.

CDNS Trading Above 50-Day & 100-Day Averages

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Closing last session at $303.04, CDNS is still down 7.9% from its 52-week high of $328.99, reached on June 20, 2024. Do all these factors signal a buying opportunity?

Let’s dive into CDNS’ prospects and determine your portfolio's best course of action.

CDNS’ Portfolio Witnessing Strong Demand

Cadence’s portfolio continues to witness strong adoption amid increasing design activity, especially in datacenter and automotive verticals. Transformative generational trends such as hyperscale computing, 5G and autonomous driving, bolstered by the proliferation of AI, are influencing design activity across semiconductor and systems companies. This is driving demand for its end-to-end EDA, IP and systems solutions. Cadence solutions are also witnessing rapid uptake as system companies endeavor to build next-gen AI and agentic AI products 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. 

In the last reported quarter, revenues of $1.215 billion topped the Zacks Consensus Estimate by 2.7% and increased 18.8% year over year. The figure surpassed the guided range of $1.165-$1.195 billion. The company also noted that sales of its Cadence.AI portfolio (powered by GenAI, AI-driven optimization and JedAI platform) nearly tripled year over year.  

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Expanding collaborations along with solid demand for new hardware systems, particularly at AI, hyperscale and automotive companies are other tailwinds. 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.

Revenues from these new hardware systems are likely to pick up pace in 2025 once the company completes building inventory of its new systems.

Management tightened its outlook for 2024 following a strong third-quarter performance. Revenues for 2024 are now projected to be in the range of $4.61-$4.65 billion, compared with the previous guidance of $4.6-$4.66 billion. Non-GAAP EPS for 2024 is expected to be between $5.87 and $5.93, compared with the previous guidance of $5.77- $5.97.

Improving China Business Bodes Well for CDNS

CDNS mentioned that its revenues from China improved in the last two quarters. Though management did not provide a specific outlook, it remains hopeful of continued momentum in the country owing to overall improvement, especially in China’s auto sector amid accelerating design activity.

Inorganic Strategy Supplementing CDNS’ Growth

Acquisitions not only have bolstered CDNS’ product portfolio but have also helped the company to expand its geographical footprint. These acquisitions have aided in securing innovative technology, intellectual property and talent pool which is imperative for sustaining momentum in a highly competitive landscape.

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.

Earlier in the year, the company had raised its revenue guidance owing to contributions from BETA CAE.

Competitive Challenges and Rising Costs

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, Synopsys and ANSYS are additional headwinds. The pending acquisition of ANSYS by Synopsys is likely to intensify competition in the EDA space for all players.

Declining Estimates for CDNS

In the past 60 days, analysts have decreased their earnings estimates for the current quarter and next quarter by 7.1% and 0.6% to $1.84 and $1.56 per share, respectively. The same for the current year has been revised upward by 0.7% to $5.91 per share.

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Is CDNS’ Expensive Valuation Justified?

Cadence’s stock is trading at a premium with a forward 12-month Price/Earnings of 45.13X compared with the industry’s 33.22X. Though the lofty valuation reflects high expectations for future growth, the near-term prospects of the company remain somewhat muddled.

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How Should Investors Play CDNS Stock?

Robust 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 the moment. 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.

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