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Bull of the Day: Cadence Design Systems (CDNS)

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In today's rapidly evolving technological landscape, few companies boast the pedigree and potential of Cadence Design Systems (CDNS - Free Report) . This Zacks Rank #1 (Strong Buy) company provides essential electronic design automation (EDA) and system design enablement (SDE) software tools that are the backbone of the global chip-making industry.

As the demand for artificial intelligence continues to soar, Cadence Design is perfectly positioned to capitalize on this growth, making it a compelling opportunity for investors seeking exposure to the future of technology.

Exceptional Positioning

While companies like Nvidia and Tesla grab headlines for their cutting-edge AI hardware, Cadence plays a crucial yet often overlooked role in the development of these groundbreaking technologies. Their EDA and SDE software tools empower chip designers to create the complex and efficient microchips that power everything from smartphones to self-driving cars.

Furthermore, working in software within the semiconductor industry is a particularly appealing vertical. Semiconductor production is a very high capex intensive business, while software is a high margin low capex business. Candence Design enjoys gross margins of 90% and net margins of 26%.

Although the AI boom is a fantastic catalyst for CDNS, the company has been a top performer since well before the big development. Cadence Design stock has compounded at an annual rate of 35% over the last decade, considerably outperforming both the industry and broad market.

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Rising Earnings Estimates

Although the earnings revision trend has languished in recent months, analysts have begun to turn bullish on expectations. In just the last week, earnings estimates have snapped higher. Earnings estimates for this year and next year have been revised higher by 2% and 6% respectively and are forecast to grow in the mid to high teens YoY.         

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Image Source: Zacks Investment Research

Technical Picture

Adding fuel to the fire, Cadence's stock experienced a technical breakout at the end of last week, surpassing key resistance levels. After trading through the $310 level, momentum took control and carried the stock to new all-time highs.

CDNS stock looks ready to continue the rally.

Image Source: TradingView

Bottom Line

Cadence Design Systems is a real gem hiding within the technology sector and is poised to benefit from the advancement of AI among the other powerful trends in technology. Investors seeking exposure to the burgeoning AI market and a company with a proven track record of success should consider adding CDNS to their watchlists.

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