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Bull of the Day: Cadence Design Systems (CDNS)

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I last profiled Cadence Design Systems ((CDNS - Free Report) ) in late March, right before the AI-propelled moonshot of NVIDIA ((NVDA - Free Report) ) shares from $250 to $475.

The reason this is important is that NVIDIA , the "King of AI" with GPU computing, is a big Cadence customer and partner in the design and simulation of semiconductor architectures.

If you are reading this before Monday afternoon July 24, you still have time to buy Cadence near $240 before it goes higher on what I expect will be another beat-and-raise quarterly report.

What Hath ChatGPT Wrought?

In a special report on ChatGPT for Zacks Confidential members in March, I reiterated why NVIDIA was so important to computing -- even before the "chatterbot that ate the internet" became all the rage.

And I also recommended investors buy the only meaningful competitor for Cadence -- another electronic design automation (EDA) wizard called Synopsys (
(SNPS - Free Report) ) -- since I already owned both NVDA and CDNS in my TAZR Trader portfolio.

Investors could have bought NVDA under $260, SNPS under $375, and CDNS near $200 in late March. You can find that report at this link or by emailing Tell 'em Cooker sent you.

ChatGPT: Time to Become An AI Conversationalist

Here was the summary of my reco...

Buy Synopsys (SNPS - Free Report) : This is half of a "duopoly" in semiconductor software EDA (electronic design automation) and SDE (system design enablement). My NVDA investors already know that I am heavily invested in Cadence Design Systems (CDNS - Free Report) , which is the "other half" and a Zacks #1 Rank, because it is a key R&D partner for NVIDIA simulation and design. Synopsys offers a full suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks. Shares are cheaper on a relative basis to Candence -- on both EPS and price/sales metrics -- and the stock is poised to break out above $400.

And here's what I wrote in my March 29 Bull of the Day feature on CDNS...

Cadence is one of my favorite "stealth" semiconductor stocks -- and even more so with the explosion of use cases for AI tools like ChatGPT, the Generative Pretraining Transformer model that has taken 2023 by storm.

Cadence is at least a fifth-gen CAD/CAM software platform that allows semiconductor manufacturers to design and simulate myriad possibilities in the intricate and microscopic architecture of sub-10 nanometer integrated circuitry.

Why Buy Cadence Now?

NVIDIA is a Cadence customer precisely because Jensen Huang and his teams of engineers are highly focused on simulating all facets of their chip design and testing.

Huang and his top engineering teams don't want to send any designs to the chip foundry that haven't been fully simulated under all parameters that are demanded from the world's top GPU "cards" -- that go by the thousands into DGX supercomputer systems and sell for $10,000 to $20,000 each depending on the generation and complexity.

It was only a few years ago that Jensen & Co. were building a supercomputer for Tesla (
(TSLA - Free Report) ) with 5,700 GPUs that could execute 1.8 exaFLOPS (a quintillion floating point operations per second). Those Volta gen cards only had 21 billion transistors and were deployed to help Tesla with the "massively parallel architectures" needed to harness the data demands of Full Self-Driving (FSD) technology.

Tesla engineers have now learned enough about AI computing that Elon Musk is building their own in-house supercomputer and may not need NVIDIA GPUs anymore (but I doubt it).

Because now that NVIDIA leads the dive under 5-nanometer architectures, their new Ampere and Grace Hopper chip sets can contain anywhere from 50 to 80 billion transistors -- in the space of a shoebox. This is to say nothing of the NVIDIA "CUDA" stack of hardware + software. CUDA stands for Compute Unified Device Architecture.

To learn more about how NVIDIA drives the AI revolution with their GPU-CUDA engines for machine learning and deep learning -- that a 10-fold stack of global corporations suddenly realized they needed -- see this recent video and article...

Nvidia DGX: Workhorse of AI Will Drive NVDA to $2 Trillion

Cadence Wins as an Arms Dealer in the Nanometer Wars

Through its Intelligent System Design strategy, the company offers software, hardware, services and reusable IC (integrated circuit) design blocks to electronic systems and semiconductor customers.

Cadence's core EDA software and services enable engineers to develop different types of ICs. Its design IPs are directly integrated into the ICs.

Besides the fact that CDNS is like a planet orbiting the star of NVDA, more Wall Street analysts are finally waking up to the importance of what Cadence calls "Intelligent System Design."

Stifel Nicolaus semi analysts upgraded CDNS from Hold to Buy this past week and launched their price target on shares from $210 to $300.

The Stifel team titled their report "AI is Likely to Drive a Virtuous Cycle for EDA."

That's an understatement. Here's what I highlighted over two years ago when I first saw NVIDIA CEO Jensen Huang feature Cadence in a virtual keynote he gave...

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."

(end of notes from April '21)

As if being a major intelligent planet orbiting the stellar NVDA wasn't enough, Cadence is embedded in other key partnerships with Taiwan Semiconductor, the giant chip foundry, and Microsoft (
(MSFT - Free Report) ), the giant engine of ChatGPT, to accelerate the physical verification of digital designs

The collaborations will help minimize design schedules and compute costs using the Cadence Pegasus Physical Verification System. Considering designers are always under pressure to meet design schedules and compute budgets, any procedural improvements are enabled to progress more efficiently -- and profitability.

Announced in April, this new system should optimize CPU usage to decrease cloud computing costs by as much as 20%.

What to Listen for on Earnings Call

Cadence has many products, growth initiatives and strategies that are too in-depth to explain here. So let me just share some of these pivot points that analysts may focus on...

Cadence is expected to benefit from secular trends like 5G, rising hyperscale computer consumption at the enterprise level, and emerging AI/ML technologies, which are all fueling digital transformation across various end markets and accelerating demand for advanced semiconductor chips.

The company's System Design and Analysis division is likely to have benefited from its growing presence in industries like 5G, aerospace & defense, wireless and communications.

Frequent product launches and strong uptake of the company's existing solutions like Palladium Z2 and Protium X2 systems, Cerebrus, Clarity 3D Transient Solver, Sigrity-X, and Xcelium Logic are likely to have driven the second-quarter performance.

The launch of Virtuoso Studio and Allegro X AI is anticipated to have helped the company tap the growing demand for generative AI solutions in the digital, verification and systems arenas.

What About the Valuation?

Besides the Stifel team upgrade, there were other notable moves in the past few weeks before Monday's quarterly earnings report...

KeyBanc: Cadence Design price target raised to $265 from $235
Wells Fargo: Cadence Design price target raised to $270 from $250

With current sales projections of $4.5 billion next year (10% growth), the stock price-to-sales valuation is very rich at 16.5 times. So, it's possible that these analysts have been somewhat reluctant to jump on the NVDA starship and are simply motivated now by FOMO in case Cadence delivers another big beat-and-raise.

So, they don't want to be caught flat-footed. But I think that with any key satellite of a new star like NVDA, it takes time for institutional investors to accept this kind of valuation.

And so most of Wall Street is still catching up to a software innovator they didn't see coming. I say to investors that you can still hitch your wagon to the NVIDIA star.

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