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Bull of the Day: Cadence Design Systems (CDNS)

Cadence Design Systems CDNS 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.

Cadence calls their unique brand and strategy of platform capabilities for chip makers Intelligent System Design.

NVIDIA NVDA 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.

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

Cadence's core EDA (Electronic Design Automation) and SDE (System Design Enablement) software and services enable engineers to develop many different types of ICs, with its design IPs directly integrated into the ICs.

Here's what I wrote last year when I was recommending CDNS shares near $130...

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."

Earnings and Estimates Drive Higher

In mid-February, Cadence posted non-GAAP earnings of 96 cents per share in fourth-quarter 2022, which topped the Zacks Consensus Estimate by 5.5% and increased 17.1% year over year.

Revenues of $900 million surpassed the Zacks Consensus Estimate by 2.2% and increased 16.4% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher demand for its products. CDNS ended the quarter with a backlog of $5.8 billion.

Performance in Details

In the fourth quarter, Product & Maintenance revenues (94% of total revenues) of $846 million were up 17.5% year over year. Services revenues (6%) of $54 million increased 1.5% from the year-ago quarter’s figure.

Geographically, the Americas, China, Other Asia, Europe, Middle East and Africa and Japan contributed 46%, 13%, 18%, 17% and 6%, respectively, to total revenues in the quarter under review.

Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 22%, 28%, 25%, 12% and 13% to total revenues, respectively.

The company’s digital IC business delivered 17% year-over-year growth in revenues. Digital Full Flow saw robust traction with 50 new customer wins in 2022. The company is expanding its digital software business by developing front-end Genus and Joules tools and signoff products like Tempus and Quantus.

The company’s Cadence Cerebrus AI-driven solution witnessed accelerating momentum and was deployed by several customers.

Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deals wins. The company won 30 new clients and 160 repeat orders in 2022. Most deal wins came from clients in the hyperscale, HPC and auto EV segments.

Cadence's System Design & Analysis Business segment reported 27% year-over-year growth as it expanded its presence beyond EDA.

In the fourth quarter, Cadence announced the launch of its LPDDR5X memory interface IP that is optimized to operate at speeds of up to 8533 megabits per second. LPDDR5X is a solution designed to enable high-speed data transfer between a system-on-chip and LPDDR5X DRAM devices, providing a high-bandwidth, low-power memory solution for a wide range of applications.

Also, the company unveiled the silicon-proven Cadence IP for GDDR6 on TSMC’s N5 process technology. It exceeds the company’s existing 16Gbps designs and helps customers to meet their design requirements.

For the fourth quarter ended, the total non-GAAP costs and expenses increased 16.3% year over year to $579 million.

Non-GAAP gross margin contracted 160 basis points to 91.1%, but the non-GAAP operating margin remained the same on a year-over-year basis to 36% in the quarter under review.

Cadence 2023 Guidance

Revenues for 2023 are projected in the range of $4-$4.06 billion. The Zacks Consensus Estimate for 2023 revenues is currently pegged at $3.8 billion, which indicates year-over-year growth of 7.4%.

Non-GAAP earnings for 2023 are expected in the range of $4.9-$5.0 per share. The Zacks Consensus Estimate for 2023 earnings is pegged at $4.52 per share, which suggests year-over-year growth of 7.3%.

For 2023, the non-GAAP operating margin is forecast in the range of 40.5-42%, with operating cash flow projected to be $1.3 to $1.4 billion. Management expects to utilize 50% of the free cash flow to repurchase shares in 2023.

ChatGPT and Your AI Future

On Valentine's Day, we trimmed some NVDA for 80%+ gains in my TAZR Trader portfolio.

Here was some of my commentary...

Last week, Barron's cautioned ChatGPT's capabilities should not be overestimated as the chatbot often generates inaccurate responses. According to experts, the way the pattern-recognition and internet-scraping technology works means it lacks real understanding of concepts, and cannot generate original, creative insights.

As you know, we've never been NVDA investors for anything to do with ChatGPT. That's because the true engines of hyperscale computing, masssively parallel AI, and knowledge innovation that Jensen Huang & Co. bring to industry and science will be staggering for years to come.

One article yesterday noted "This year has been a good one for Nvidia and its investors, as the company's shares have risen 46% since the end of 2022. As the BofA analyst says, any pullback in the stock should be 'short lived' as investors ready themselves for the company's GTC conference in March."

Of course TAZR Traders could not agree more with Arya, or the investors who now chase the stock to our benefit.

And in other AI news, we still love the software design partner of NVDA, Cadence Design Systems (CDNS) after its beat-and-raise quarter where backlogs are at a multi-year high of $5.8B and margins should continue to grow year-over-year.

Here were a couple of the stand out calls after earnings...

Cadence Design price target raised to $235 from $200 at Needham: Analyst Charles Shi said the company guided for hardware revenue to be front-half loaded, implying a flat revenue profile for the overall business through 2023, but there could be "meaningful upside" to Cadence's 12%-14% outlook should the industry's cyclical recovery arrive in the second half of the year and drive growth in its hardware business from the first half.

Cadence Design price target raised to $225 from $215 at KeyBanc: Analyst Jason Celino observed that Cadence closed out 2022 in style, posting better top-line and bottom-line results on broad-based strength. More importantly, the company "issued meaningfully higher 2023 guidance and expects 12%-14% year-over-year growth, the strongest initial growth forecast in our coverage history." Celino believes the stronger guidance is mainly attributed to a more upbeat outlook on hardware.

(end of Valentine's Day commentary excerpt)

Newsflash: Yesterday, the powers that be at ChatGPT creator OpenAI said "let's slow down before things get out of hand."

To learn more, follow my posts on Twitter @KevinBCook.

And if you want a copy of my latest ChatGPT report, where I detail why Morgan Stanley analysts had to reluctantly upgrade NVDA shares, just email Ultimate@Zacks.com and tell 'em Cooker sent you.

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