Bull of the Day: Cadence Design Systems (CDNS)
Software is the brains of chip design and testing, so learn why NVIDIA uses Cadence
Cadence Design Systems CDNS is a $43 billion provider of software that designs semiconductors. After a beat-and-raise Q2 reported on July 26, estimates, price targets and the stock have all made new highs.
Here's what I wrote on May 21 for my TAZR Trader members when we bought shares and I explained the company's unique business...
Portfolio is buying Cadence Design Systems (CDNS) with a 7% allocation between $122 and $125. While I'm fine paying $125, it could fill yesterday's gap back to $122.
I profiled this $35 billion provider of industrial automation design products (think CAD/CAM goes AI) last August and again in December, saying we had to be buyers of dips under $110. See my Dec 28 commentary "Stealth AI Companies" for more background.
Through its System Design Enablement (SDE) strategy, the company offers software, hardware, services and reusable IC design blocks (IPs) to electronic systems and semiconductor customers.
Cadence’s core Electronic Design Automation (EDA) software and services enable engineers to develop different types of ICs. Its design IP’s are directly integrated into the ICs.
This Zacks #2 Rank is not cheap at 12X sales, but after a solid beat-and-raise Q1 reported in late April, several analyst price targets moved to $160 and higher.
(end of May 21 TAZR excerpt)
Nexus of Software and Industrial Design
The software to design semiconductors has become ever more important for at least 3 reasons...
First, transistor architecture has slipped to sub-microscopic levels under 10 nanometers, smaller than the coronavirus.
Second, the proliferation of applications in autos, mobile, home, factory, and datacenter are accelerating demand and custom solutions for OEMs.
Third, the engineering, testing and simulation of these ultra-miniature designs are critical before they are shipped to a chip foundry, or "fab."
Cadence posted second-quarter 2021 non-GAAP earnings of 86 cents per share, which topped the Zacks Consensus Estimate by 14.7%. The bottom line increased 30.3% year over year.
Revenues of $728 million surpassed the Zacks Consensus Estimate by 1.7% and increased 14% on a year-over-year basis. The top line benefited from continued strength across all segments. The company ended second quarter with backlog of $3.9 billion.
“Cadence delivered outstanding financial results for the second quarter on broad based customer demand as the Cadence team continues to execute exceedingly well.” said Lip-Bu Tan, chief executive officer. “Generational drivers are fueling strong design activity and our ISD strategy (Intelligent System Design) coupled with a strong innovation engine that has led to introducing eight significant new products so far this year, positions us extremely well to delight our customers and accelerate growth.”
After the strong quarter and outlook, Wall Street analysts moved full-year EPS from $3.04 to $3.17, representing 13.2% growth. Revenues are now projected to hit $2.94 billion for a 9.5% advance. Here were some analyst reactions...
Baird analyst Joe Vruwink raised estimates and the firm's price target on Cadence Design to $168 from $160 and keeps an Outperform rating on the shares. The analyst noted its strong Q2 results and raised guidance as well as a CEO transition that he expects should be seamless.
KeyBanc analyst Jason Celino raised estimates and his price target to $166 from $162, noting broad-based strength in the beats with particularly robust strength in digital, functional verification, and China. He found that the company raising its 2021 guidance on all metrics due to better visibility and continued strong demand was also a plus that may have softened the surprise of an announced CEO transition, concluding "CDNS remains one of our core ideas to own. Remain buyers."
The NVIDIA Connection
Since that July report and analyst reaction, shares took out old resistance highs at $148 and are still pushing new all-time highs above $157 as I type on Monday afternoon.
So should new buyers of CDNS put money to work up here? If only to make you pay attention and learn more about the industry, I would say yes, you can start a position near $155. And then you'll be ready for any pullbacks toward $150.
That's how important I think Cadence is, even trading at 14 times sales. Because as I've explained to my followers, it's really almost in a duopoly with its nearest peer Synopsys SNPS, who also just delivered a big beat-and-raise quarter.
And as the US Senate just approved a large stimulus bill for the chip industry, more engineering tools will be in demand. The bill provides $52 billion for domestic semiconductor manufacturing, as well as a 30 percent boost in funding for the National Science Foundation and $29 billion for a new science directorate to focus on applied sciences.
But my biggest reason for staying long CDNS is when I saw them featured in an NVIDIA NVDA presentation in June. CEO Jensen Huang delivered a video keynote to the Teratec HPC (High-Performance Computing) virtual conference.
After discussing some of the latest applications of massively-parallel NVIDIA architectures across technology, science, medicine, and the arts, Jensen explained why simulation is so important in their chip designs. And the only featured partner in that segment, indeed the entire 18-minute video I believe, was Cadence.
NVIDIA is a good customer to have. I share that clip in my Top Stock Pick video, recorded Monday morning...
Cadence is a Top Pick of Top Chip Designers
Disclosure: I own shares of NVDA and CDNS for the Zacks TAZR Trader portfolio.
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Cadence Design Systems, Inc. (CDNS): Free Stock Analysis Report
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