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Bull of the Day: Cadence Design Systems, Inc. (CDNS)

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Cadence Design Systems, Inc. (CDNS - Free Report) stock provides investors the chance to buy into the booming world of AI and semiconductors. More importantly, Cadence is poised to benefit from the expansion of AI and beyond no matter who the near-term and long-term winners are.

Cadence’s modeling and computational software helps companies design chips and other vital technologies. Cadence isn’t a Magnificent 7 stock, but it works with Nvidia and it has crushed the other six of those tech titans during the last decade, with CDNS up 1,900%. Cadence also topped our Q4 estimates earlier this month and provided solid guidance.

Turning “Concepts into Reality”

Cadence’s modeling and computational software is used to design semiconductors and other highly complex technologies. The firm’s tagline is helping “turn design concepts into reality.” Cadence is part of the broader electronic design automation segment that’s growing more crucial as chips get smaller.

Cadence and the electronic design automation field empower companies such as Nvidia and many others by providing them with the ability to simulate chips before they are made. The growing complexity of semiconductors needed for AI, hyperscale computing, and beyond have transformed Cadence into an invaluable partner for many firms and a key cog in the broader tech and chip ecosystem.  

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Cadence boasts Nvidia (NVDA - Free Report) as a customer because the GPU and AI chip powerhouse loves its simulation capabilities. The intelligent system design powerhouse might become even more important as everyone else races to catch Nvidia and design ever-more complex and microscopic chips in the sub-5 nanometer space.

Growth and Outlook

Cadence is one of the few major players in the vital electronic design automation world. Cadence’s fiscal 2023 revenue climbed by 15% to help boost its adjusted earnings by 20%. Cadence also topped our Q4 sales estimate on February 12 and it beat on the bottom line once again, having now surpassed our EPS estimates for over five years running.

Cadence’s revenue benefited from higher customer demand amid robust design activity and strong operational execution. CDNS ended 2023 with a record backlog of $6 billion and current remaining performance obligations of $3.2 billion. CDNS has also expanded its well-established partnerships with the likes of Nvidia and Arm (ARM - Free Report) .

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Cadence provided solid 2024 guidance as it grows alongside “secular trends of digital transformation, hyperscale computing and autonomous driving, all bolstered by an AI super-cycle, continue to fuel strong broad-based design activity,” CEO Anirudh Devgan said on its fourth quarter earnings call. “We continue successfully executing to our Intelligent System Design strategy, that triples our TAM (total addressable market) opportunity while greatly expanding our portfolio.”

Cadence is projected to post 12% higher sales growth in FY24 and then boost its top line by another 12% in FY25 to reach $5.15 billion.

Meanwhile, its adjusted earnings are projected to climb 14% this year and 18% in fiscal 2025. Cadence’s FY25 earnings estimate has popped by 6% since its Q4 release to help it land a Zacks Rank #1 (Strong Buy) right now and continue its notable stretch of upward earnings revisions.

Performance and Technical Levels

Cadence stock is up 1,900% in the last 10 years vs. tech’s 275%. This run helped CDNS rather easily outpace Apple, Amazon, Alphabet, Microsoft, Meta, and Tesla—with TSLA’s 1,100% climb coming the closest of the bunch. CDNS has crushed all of these same Magnificent 7 stocks outside of Tesla (TSLA - Free Report) during the last five years as well, up 435%.

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Cadence has surged by nearly 60% in the past year, with it up 31% in the last six months vs. Tech’s 17%. Cadence climbed again on Thursday on the back of Nvidia’s impressive quarter. Despite the strong performance, CDNS still trades below its early February peaks and its average Zacks price target.

CDNS rebounded back above its 21-day moving average again on Thursday. Yet it remains below overbought RSI levels on both one-year and 10-year timeframes.  


Cadence is hardly a value stock, trading at 58.9X forward 12-month earnings vs. Tech’s 25.9X.

That said, CDNS trades at a 20% discount to its five-year highs and not too far above its median, highlighting that Wall Street has been very willing to pay up for Cadence. On the PEG ratio front, which accounts for its longer-term EPS growth outlook, CDNS trades at a 42% discount to its highs and below its five-year median.

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Bottom Line

Cadence’s modeling and computational software is expanding alongside complex chips, AI, and other booming areas of tech.

CDNS appears to be worth considering as an investment in advanced semiconductors and artificial intelligence without having to predict if Nvidia ends up at the top of the AI pile down the road or wager on more unknown and unproven firms.   

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