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For Immediate Release
Chicago, IL – May 11, 2022 – Zacks Equity Research shares Cadence Design Systems CDNS as the Bull of the Day and Align Technology ALGN asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Marqeta, Inc. MQ, Affirm Holdings, Inc. AFRM, and Riot Blockchain, Inc. RIOT.
Here is a synopsis of all five stocks:
Bull of the Day:
Cadence Design Systems is the $40 billion provider of Electronic Design Automation (EDA) and System Design Enablement (SDE) software tools for semiconductor manufacturers. Cadence calls their unique brand and strategy of platform capabilities Intelligent System Design.
In fact, 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.
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.
Here's what I wrote in April of 2021 when I was recommending CDNS shares below $130 -- they eventually rallied to $190 before the current tech rout...
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)
This Zacks #1 Rank is not cheap trading over 11X sales -- just like NVIDIA -- but after a solid beat-and-raise Q1 reported in late April, several analyst price targets moved above $200. We'll look at the analyst moves and commentary after we go over some of the report details.
Another Beat-and-Raise Quarter
Cadence posted non-GAAP earnings of $1.17 per share in Q1 2022, which topped the Zacks Consensus Estimate by 15.8% and increased 41% year over year.
Revenues of $902 million surpassed the Zacks Consensus Estimate by 5% and increased 23% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher demand for its products, also reflected in an order backlog of $5.1 billion.
Driven by strong first-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.395-$3.435 billion compared with the earlier guidance of $3.32-$3.38 billion.
The Zacks Consensus Estimate for 2022 revenues moved up from $3.36 billion to $3.4B, which indicates annual growth of 13.8%.
Non-GAAP earnings for 2022 are expected in the range of $3.89-$3.97 per share compared with the earlier guidance of $3.70-$3.80 per share. The Zacks Consensus Estimate for 2022 earnings subsequently jumped from $3.73 per share to EPS of $3.89, which suggests yearly growth of 18.25%.
In the first quarter, Product & Maintenance revenues (93.8% of total revenues) of $846 million were up 21% year over year. Services revenues (6.2%) of $56 million increased 51.4% from the year-ago quarter's figure.
Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 47%, 16%, 18%, 14% and 5%, 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%, 27%, 28%, 13% and 10% to total revenues, respectively.
The company's digital and signoff business delivered 23% year-over-year growth in revenues. Digital Full Flow saw robust traction with 15 new customer wins. The company's Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers.
Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deal wins. The company noted that it won 10 new clients and 50 repeat orders in the first quarter which included more than half for both the platforms. Most of the deal wins came from clients in the hyperscale, AI/ML and networking domains.
In 2021, Cadence introduced 13 new products, including Cadence Helium Virtual and Hybrid Studio, Midas Safety platform and Allegro X.
Cadence's System Design & Analysis Business reported 22% year-over-year growth.
CDNS PT raised to $215 from $205 at KeyBanc: Analyst Jason Celino highlighted the Q1 $45 million revenue beat on broad-based strength and the 2022 revenue guide bump of $56M at the midpoint of $3.395B-$3.435B.
CDNS PT lowered to $203 from $211 at Baird: Analyst Joe Vruwink kept an Outperform rating on the shares and said he remains a buyer of the shares following its earnings report as all business groups saw strength with recurring revenues increasing 19% and upfront revenues increasing 49%. He raised the full-year outlook given 1Q strength, upside in 2Q, and favorable backlog development.
CDNS PT raised to $193 from $185 at Needham: Analyst Charles Shi noted that yet another beat-and-raise quarter proves that Cadence can accelerate growth and expand margins in spite of the macro headwinds -- inflation and semiconductor cycles -- that have been weighing on most software and chip stocks.
Shi also observes that his recent conversations with investors indicate growing interest in EDA stocks like Cadence Design, which is "increasingly seen as a potential hedge against a recession and the semiconductor cycle."
In this week's Top Stock Picks video, I highlight why I think the comments from Shi are noteworthy and why I think you can buy CDNS shares now under $140 as they exhibit good relative strength vs the broader Semi sector.
Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio.
Bear of the Day:
I last wrote about Align Technology, the maker of the Invisalign "smile straighteners," on February 9 as the Bear of the Day. I didn't like the situation then at $550, and I'm not happy about it now over 50% lower at $250.
The reason I'm not happy about it is that this is a company I've believed in for a long time, ever since I started buying it for my Healthcare Innovators portfolio in 2017.
To me, this innovator was going to revolutionize orthodontic care for the global masses with affordable and digitally-precise clear aligner technologies that could be created remotely and shipped hundreds of miles to a smiling face and mouth.
This goes far beyond the stigma of "brace face" or "metal mouth." This is about transcending boundaries of space and time and poverty to change a poor child's smile and confidence who may otherwise not have access to an orthodontist.
Imagine a dental professional in India or China being able to serve poor and remote patients with the Align iTero digital scanner that could custom design a safe, light, and flexible device to improve millions of smiles -- and their confidence -- around the world. That kind of confidence is priceless for most kids.
Unfortunately for Align, and all those millions of kids, the earnings outlook for ALGN as fallen hard during the current market malaise and inflation/recession worries. In just the past 30 days, EPS estimates have dropped 19% from $12.75 to $10.37.
And next year's EPS consensus fell 16.5% to $13.05. Let's look at the details of the report and guidance to find out why analysts had to lower their expectations.
Q1 Quarterly Report April 27
Align Technology first-quarter 2022 earnings per share (EPS) were $2.13 compared to the year-ago $2.49, reflecting a decline of 14.5%. The quarter's EPS lagged the Zacks Consensus Estimate by 4.9%.
GAAP EPS for the quarter was $1.70, down from the year-ago EPS of $2.51, reflecting a plunge of 32.3%.
Revenues rose 8.8% year over year to $973.2 million in the quarter, missing the Zacks Consensus Estimate by 2.9%.
In the first quarter, revenues at the Clear Aligner segment rose 7.5% year over year to $809.7 million, with strong revenue growth across regions and products. Within the segment, Invisalign case shipments amounted to 598,835 for a gain of only 0.5% year over year.
During the quarter, Clear Aligner case volumes declined 1.5% and rose 3% year over year in the Americas and International regions, respectively. Clear Aligner case volume for teenage patients increased 6% year over year.
Align Technology price target lowered to $418 from $722 at Credit Suisse: Analyst Matt Miksic kept an Outperform rating on ALGN but noted the slowdown in cases late in the quarter, driven by more economically sensitive behavior among patients. Given the uncertainty around the magnitude and duration of this type of consumer behavior, management withdrew guidance and Miksic has trimmed his expectations for Clear Aligner sales by $345 million. The analyst continues to view Align as an attractive disruptive growth story, with multiple growth drivers targeting a large unpenetrated market.
Align Technology price target lowered to $510 from $625 at Baird: Analyst Jeff Johnson kept an Outperform rating on ALGN but said that he cut numbers twice into its 1Q report and even that wasn't enough. And while management pulling guidance for 2022 doesn't exactly inspire near-term confidence, Johnson said taking a 12-month and longer view, he still sees compelling risk/reward.
Align Technology price target lowered to $524 from $575 at Morgan Stanley: Analyst Erin Wright lowered kept an Overweight rating on ALGN, even after the company's Q1 results missed expectations and it retracted its previous 20%-30% revenue guidance for 2022. Wright noted that while the company also cut its non-GAAP operating margin outlook to about 23% from 27%, Align did reiterate confidence in its long-term growth outlook.
Align Technology price target lowered to $425 from $575 at Stifel: Analyst Jonathan Block kept a Buy rating on ALGN after the company's Q1 results missed expectations and it retracted its previous growth guidance for 2022. While the stock was likely already pricing in a guidance revision, he expects estimates and the stock to move "materially lower." But even with an increased amount of consumer uncertainty, he likes the risk/reward for shares given what he calls a "compelling valuation" as well as its upcoming new products, global markets, and offerings.
Align Technology price target lowered to $440 from $600 at Piper Sandler: Analyst Jason Bednar kept an Overweight rating on ALGN following the Q1 results, noting that since management pulled 2022 revenue guidance and pointed to Invisalign visibility challenges, this would push lower consensus estimates and the multiple investors are willing to pay for this stock until evidence materializes that Invisalign demand is rebounding. Bednar remains confident the long-term growth potential for the clear aligner market and Align's dominance in the category are unaltered. He would be a buyer of the stock "once the dust settles."
Bottom line for ALGN: I think the stock is a screaming buy here near $250. But we do have to wait until "the dust settles" and estimates stop going down -- and start heading back up. The Zacks Rank will let you know.
Expect These 3 Firms to Beat on Q1 Earnings
The Zacks Business Services sector is expected to have performed well in the January-March quarter of 2022, backed by a solid demand environment that was driven by growth in manufacturing and service activities. However, continued supply-chain disruptions, cost inflation and labor issues are likely to have remained headwinds.
Per the latest Earnings Trend report, the sector's first-quarter earnings are anticipated to witness year-over-year growth of 20.5%, higher than the 19.9% rise recorded in the previous quarter. The sector's revenues are projected to increase 12.6%, lower than the previous quarter's 13.4% rise. However, margins are expected to decline by 0.5% against 1.6% growth in the prior quarter.
Let us discuss the factors that might have played a key role in shaping the performance of Business Services stocks in the quarter.
Key Factors to Consider for Service Stocks
Economic activities in manufacturing, as well as non-manufacturing sectors, have stayed in the pink during the quarter. Both the manufacturing PMI and the Services PMI, measured by the Institute for Supply Management, have stayed above the 50% mark for the past 23 consecutive months, indicating continued expansion.
Sector-specific factors that acted as tailwinds in the quarter are the essentiality of certain services like waste management, rise in demand for risk mitigation and consulting services, increased expertise in improving operational efficiency and reducing costs, successful work-from-home models, and digital transformation.
Services pertaining to transportation & warehousing; management of companies; retail trade; wholesale trade; accommodation & food; mining; entertainment & recreation; utilities; construction; healthcare & social assistance; finance & insurance; education; professional; and scientific & technical have stayed healthy in the quarter.
Stocks Poised to Beat This Season
With the existence of a number of players in the sector, finding the right business services stocks that have the potential to beat on earnings can be daunting. Our proprietary methodology, however, makes it fairly simple.
You could narrow down the list of choices by looking at stocks that have the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter. You can see the complete list of today's Zacks #1 Rank stocks here.
Earnings ESP is our proprietary methodology for determining stocks that have the best chances to surprise with their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of an earnings surprise is as high as 70%.
Here are our picks:
Marqeta, Inc.: This company runs a cloud-based open application programming interface platform that delivers card issuing and transaction processing services to developers, technical product managers and entrepreneurs.
Marqeta will report first-quarter 2022 results on May 11.It has an earnings ESP of +2.70% and currently carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings in the to-be-reported quarter has been stable at a loss of 9 cents in the past 30 days.
Marqeta's performance in the to-be-reported quarter is expected to have benefited from the addition of new customers as well as growth from existing customers. The company has a customer base that is growing fast and expanding in new geographies.
Marqeta's ability to deliver modern infrastructure, enabling companies to deliver innovative, high-volume card programs at scale, is a key tailwind. New e-commerce experiences like on-demand delivery and buy now, pay later, which evolved amid the pandemic, are expected to be significant contributors to the company's performance in the quarter.
Affirm Holdings, Inc.: This operator of a platform for digital and mobile-first commerce will report third-quarter fiscal 2022 results on May 12.
Affirm has an earnings ESP of +23.39% and currently carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings in the to-be-reported quarter has been stable at a loss of 50 cents in the past 30 days.
The company's performance in the to-be-reported quarter is likely to have benefited from increase in gross merchandise volume, active merchants and active customers. Technological investment is a key tailwind for Affirm in the long term.
Riot Blockchain, Inc.: This bitcoin mining company is expected to register strong performance in the to-be-reported first quarter of 2022, driven by growth in mining revenues.
Riot Blockchain has an earnings ESP of +25% and currently carries a Zacks Rank #3.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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Align Technology, Inc. (ALGN) : Free Stock Analysis Report
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