Cadence Design Systems Advances 4% After Topping Q3 Views

Cadence Design Systems (NASDAQ: CDNS) jumped more than 4% higher mid-session Tuesday, following the company's better-than-expected third-quarter report.

The maker of electronic design software earned $0.80 per share on revenue of $750.9 million. Those were year-over-year increases of 14% and 13%, respectively. Analysts had expected earnings of $0.75 per share and revenue of $741 million.

According to MarketBeat earnings data, Cadence has a long history of beating both top- and bottom-line views.

The stock cleared a six-week cup-shaped base Monday, surpassing a buy point above $168.61, reached on September 10. However, shares reversed lower Monday, ahead of the earnings report, finishing at $167.37, a gain of $0.61 or 0.37%.

Shares jumped out of the gate Tuesday morning, gapping up 1.42% at the open, then gradually trended higher.

For the fourth quarter, Cadence expects total revenue in the range of $745 million to $765 million. Net income per diluted share is expected to be in the range of $0.76 to $0.80.

For the full year, the company expects total revenue in the range of $2.96 billion to $2.98 billion. It expects net income per diluted share to be in the range of $3.24 to $3.28.

Analysts had forecast earnings of $0.74 a share on revenue of $747 million in the fourth quarter. For the full year, Wall Street pegged earnings at $3.18 per share, which would be a 14% increase. Next year, analysts expect earnings of $3.51 per share, a 10% gain.

However, if the company's own guidance holds, it would result in year-over-year drops in revenue and earnings for the current quarter.

Is this something to be concerned about? Already the pace of earnings and revenue growth has been declining. Earnings growth slowed from 54% three quarters ago to the most recent 14%. On the revenue side, growth slowed from 37% three quarters ago to 13%.

Specializes In High-Demand Systems

It's important to note the company's exact line of business: Cadence's products are integral components in the design of circuit boards, system-on-a-chip technologies, and integrated circuits. In other words, exactly the kinds of systems and products that are in exceedingly high demand right now.

Tuesday's price action, which was accompanied by heavier-than-normal trading volume, is indeed a signal that institutional investors have conviction in the stock and are snapping up shares.

In the earnings conference call, CEO Lip-Bu Tan acknowledged trends driving the company's growth.

"The data-driven era is being fueled by generational trends like 5G, hyperscale computing, autonomous driving, and industrial IoT that are accelerating the digital transformation of several industries. This requires continued innovation in key areas such as compute, connectivity, storage, and data analysis, which in turn is driving secular semiconductor growth and design activity across a wide range of end markets," he said.

In July, the company announced that Tan would transition to the role of executive chairman on December 15, with current company president Anirudh Devgan assuming the role of president and CEO at that time.

In the conference call, analyst Jason Celino of KeyBanc Capital Markets asked about automakers, such as Hyundai and Volkswagen, which have said they plan to design some of their own semiconductors, given supply-chain bottlenecks.

Tan said the company is carefully monitoring the semiconductor global supply chain.

"So far we don't see any slowdown in our design activity across our customer base. And then as you know, our product is very much focused on the R&D engineering, designing the chip system," he said, adding that Cadence is taking a multi-year approach, rather than just looking at the short term.

Potential In Automotive Industry

With regard to specific advances in the automotive industry, Tan said the company sees a great deal of design activity in autonomous driving.

"Clearly, we're excited about the automotive platform that will create opportunities in the multi-years to come," he added.

Looking ahead, is Cadence a buy?

Certainly, institutional investors don't seem put off by slowing earnings and sales growth, or even the prospect of a year-over-year decline in the current quarter. That's encouraging for individual investors wanting to ride the pros' coattails.

The stock is currently in the buy range after Monday's breakout, but it's unwise to chase a breakout once it advances more than 5% from its buy point. That's because even a normal, small pullback could shake you out of a stock that may have the potential to climb even higher.