Cadence Design Systems Inc., (NASDAQ: CDNS), has recently experienced a significant downturn, with a drop of over 23% within the last month. Yet analysts at Piper Sandler view this as presenting an opportunity.
Analysts are optimistic
They upgraded the stock to Overweight and maintained their bullish price target of $318, which suggests a possible 25% increase.
The belief is that the recent drop in the market offers an opportunity to invest in a software asset with a high level of value within the semiconductor industry.
Clarke Jeffries of Piper Sandler, an analyst at the firm, said that, despite the company’s mediocre Q2 results, which contributed to its decline, amidst broader uncertainties in industry, it is on track for a recovery.
Jeffries cited specific challenges, such as the transition to Verification technology and the pressures of the Chinese market. However, Jeffries remains confident about Verification delivery ramp up and financial improvement in the next quarters.
Baird analysts recently confirmed their confidence in Cadence. They maintained an Outperform ranking but adjusted their price target slightly from $341 up to $338 after the release of Q2 results.
This slight change was attributed to the recalibration in expectations. However, they expect stronger revisions of estimates for FY25 that could push up the price.
Cadence Q2 Earnings
Cadence’s Q2 results confirm this sentiment. The company exceeded expectations, with non-GAAP earnings of $1.28, exceeding estimates by $0.05, and revenue of $1.0 billion, which was $20 million higher than forecast.
Financially, the company is doing well thanks to a robust market in AI, automotive, and hyperscale.
Cadence reported an impressive second quarter, with $6.0 billion in backlog. This indicates a strong demand for the products it offers.
Fiscal outlook 2024 is promising, with revenues projected to range from $4.60 to $4.66 Billion and operating margins non-GAAP expected to be between 41.7% and 43.3%.
Cadence anticipates earning between $1.165 and $1.195 in the next quarters. Cadence also expects to maintain strong non-GAAP earning per share. This shows their ability of performing well even in unpredictable markets.
Recently acquired moat and competition
When you look at the core operations of Cadence’s business, its prowess as an EDA company is reinforced by the innovative products it offers and the strategic acquisitions like BETA CAE Systems.
The acquisition of Cadence not only expands Cadence’s simulation product portfolio, but it also increases its presence in several key sectors such as automotive and aerospace. This could add $40 million to revenue for FY24.
Cadence’s Cadence.AI platform and its next-generation hardware, such as the Palladium Z3 or Protium X3 systems that are setting standards for performance and verification in semiconductors and AI applications are key to Cadence’s strategic move.
Cadence’s leadership position in the verification market continues to be a positive factor for business.
The AI chip industry will benefit from the major partnerships and innovations in product design that are being made by Intel.
The advancements Cadence has made position it well within the semiconductor industry. This dynamic sector is expected to continue growing, thanks in part to increased R&D spending from major players, especially those involved with AI.
A forward P/E of 42 still places Cadence at an elevated valuation compared with its competitors, expressing the high expectations that are embedded in its growth trajectory.
We now move on to the technical analysis of the chart to see what it says about Cadence’s share price trajectory in the light recent market movement and analyst upgrades.
The analysis provides a new lens to evaluate the investment potential in Cadence, as the company continues to lead the industry in semiconductor design.
The long-term upward trend remains intact
Cadence stock is a standout performer within the semiconductor industry, having increased six-fold since its lows of 2020 in the past four years.
This performance is truly impressive because the stock’s volatility is much lower than that of its counterparts in the highly cyclical semiconductor industry.
TradingView CDNS Chart
Although the stock has experienced a bearish trend in the short- and medium-term, the long term uptrend is still intact. Existing shareholders of the stock who bought it at lower prices do not need to panic.
Recently, the stock found support at $241 above its Fibonacci 38.2% retracement of 2020 lows.
Analysts are bullish about the stock and investors who share their optimism can purchase it at around $250. A stop-loss at the 38.2% Fibonacci Retracement of $222 is a good place to set a loss.
Traders that are bullish but haven’t taken a position short yet should refrain from taking one at the current level because the price has fallen dramatically in recent months and the RSI has reached an oversold state on the daily chart.
A new short position is only considered if the price of the stock rises above $280, or falls below $223.
The post below asks: Should you purchase Cadence following the 23% price drop recently? Piper Sandler’s opinion may change as new information unfolds.
