Cadence Rises 27% in a Month: How Should You Play the Stock?
Cadence Design Systems CDNS stock surged 27.3% in the past month, outperforming the Computer-Software industry, the Zacks Computer and Technology sector and the S&P 500 composite's growth of 25.3%, 22.6% and 15.3%, respectively.
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The trigger has been the company's stellar first-quarter results, with the stock gaining 12% since April 28. The stock closed last trading session at $320.30 and is now much closer to its 52-week high of $328.99.
So, the question now arises is whether to stay invested or pull out? Can the stock rally further? Let us analyze the stock in detail to ascertain if it is worth investment consideration.
Broad-based demand for its solutions amid robust design activity is a key catalyst. Secular trends like 5G, increasing usage of hyperscale computing and autonomous driving are influencing design activity across semiconductor and systems companies. This is likely to open up opportunities for its end-to-end EDA, IP and systems solutions. The focus on Generative AI, Agentic AI and Physical AI is leading to an exponential increase in computing demand and semiconductor innovation. This bodes well for Cadence.
To capitalize on this opportunity, it has been collaborating with several tech giants, including Qualcomm and NVIDIA Corporation NVDA, on their next-generation AI designs across both training and inference. The company also expanded its partnership with NVIDIA for the latter's Grace Blackwell architecture to accelerate computing and agentic AI solutions. It is among the first adopters of the NVIDIA Omniverse blueprint for AI-factory digital twins, which will augment data center design and operations.
Cadence 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 Taiwian Semiconductor Manufacturing, Intel and Arm Holdings.
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Amid rapid AI proliferation, the Cadence.ai portfolio has been gaining momentum along with AI-powered products such as Cadence Cerebrus. The product had more than 1000 tapeouts year to date and 50 new logos in the first quarter. Going ahead, the company is likely to benefit from customers increasing their R&D spending in AI-driven automation. On the last earnings call, Cadence highlighted that it has not seen any shifts in customers' behavior presently, as they continue to invest in next-generation designs.
Cadence continues to invest heavily in verification and digital design products, which is helping it to launch products that address the ever-growing needs of electronics and semiconductor companies. The company's verification business has been 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.
The strategic acquisition plan has played a pivotal part in developing the company's business in the last few years. To strengthen its IP business, the company announced the acquisition of Secure-IC, which will expand its IP portfolio, including interface, memory, AI and DSP solutions. In April 2025, Cadence signed a definitive agreement with Arm Holdings to acquire its Artisan foundation IP business. The acquisition includes a suite of standard cell libraries, memory compilers and general-purpose I/Os, all finely tuned for advanced process nodes at leading global foundries.
Driven by strong results, management upgraded its outlook for 2025. Revenues for 2025 are now estimated to be in the range of $5.15-$5.23 billion compared with $5.14-$5.22 billion guided earlier. Non-GAAP EPS for 2025 is expected to be between $6.73 and $6.83 compared with $6.65-$6.75 guided earlier.
Weakness prevailing over global macroeconomic conditions and substantial exposure to the semiconductor vertical are concerning. Any reduction in R&D spending for companies within the semiconductor sector could affect CDNS' top-line performance.
Higher operating costs and stiff competition in the EDA/AI space from the likes of Keysight Technologies, 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. The transaction is expected to close in the first half of 2025.
While Cadence is expanding aggressively through M&A, acquisitions may distract from core performance if integration falls short or synergies do not materialize as expected, which could weigh on margins.
Cadence stock is trading at a premium, with a forward 12-month Price/Earnings ratio of 45.04X compared with the industry's 32.02X. In comparison, SNPS and ANSS trade at multiples of 32.16 and 28.01, respectively.
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Analysts remain bearish on the stock, as evident from the downward estimate revision in the past 60 days.
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Cadence, with its strong fundamentals, robust AI-driven demand and a resilient recurring revenue model, remains a compelling opportunity. The company's prominent position in the EDA space and strategic partnerships with tech giants like NVIDIA and Qualcomm position it well for long-term growth. While macro uncertainty, integration risks and valuation are valid concerns, the company's upgraded guidance and expanding market footprint support a continued bullish outlook. Given the strong momentum and secular tailwinds, holding the stock remains a prudent strategy for long-term investors.
CDNS currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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