Cadence Design Gains 12% As AI Excitement Boosts Chip Stocks

Key Points

• Cadence Design Systems shares popped on expectations on business from AI applications.
•  In April the company reported Q1 earnings of $1.29 per share, up 10% from the previous year, with revenue reaching $1.021 billion, a 13% gain.
• Analysts have a "moderate buy" rating on the stock. 
• The company's stock cleared a flat base buy point, rising 10.22% on May 25.
• A pullback to a moving average may offer the next buy opportunity. 

Cadence Design Systems NASDAQ: CDNS shares are up 12% in May, given a boost, like so many other chip companies, by excitement about AI following Nvidia Corp.’s  NASDAQ: NVDA blowout quarterly report. 

San Jose, California-based Cadence specializes in software and hardware used to design and verify integrated circuits and electronic systems. The company’s electronic design automation software is used in various types of integrated circuits. 

The stock didn’t initially get any traction after the company reported first-quarter results on April 24. 

Earnings of $1.29 a share were up 10% from the year-earlier quarter, and revenue of $1.021 billion marked a gain of 13%. As Cadence Design Systems earnings data show, the company beat top and bottom line views. 

But as frequently happens, investors were disappointed with the guidance. 

Company Sees Sales, Earnings Growth

For the current quarter, the company sees revenue in the range of $960 million to $980 million. It sees net income per share in the range of $1.15 to $1.19. Both would be year-over-year increases, but analysts had forecast revenue of $1.01 billion and earnings of $1.25 per share. 

For the full year, Cadence sees revenue in the range of $4.03 billion to $4.07 billion. Net income per share for 2023 is expected to be in the range of $4.96 to $5.04. Again, analysts wanted more, eyeing earnings of $4.98 a share on revenue of $4.04 billion. While Cadence’s projected range included analysts’ estimates, they were on the low end. 

Shares gapped down hard after the report, as you can see on the Cadence Design Systems chart, set to a bar or candlestick view, which clearly shows the gap. 

Moving With The Broader Market

There’s been some volatile trade recently, with the stock reversing higher along with the broad market on May 18, then gapping down on May 23 and May 24, also in keeping with market action. 

Cadence’s recent price movements offer a good lesson on how stocks tend to move together, either in response to broad-market sentiment or to a development with a company in a related business. 

Despite beating views, Cadence’s sales and earnings growth decelerated in the past two quarters. 

Even with some hiccups, Wall Street sees a bright future for Cadence, particularly in the era when all things AI are rewarded.

Machine Learning And AI

For example, its Cadence Cerebus tool uses machine learning and artificial intelligence to enhance complex chip-design testing. It helps identify potential design flaws, improve test coverage, and optimize the testing process.

Cadence Design Systems analyst ratings show a “moderate buy” view on the stock. That rating is essentially the same as “outperform,” and it means analysts believe the stock will do somewhat better than the broad market. 

Despite the gap lower after earnings, four analysts boosted their price targets on Cadence immediately following the quarterly report.

Innovation is a key driver for price appreciation in fast-moving tech stocks like Cadence. Along those lines, the company on May 28 said it expanded its partnership with privately held Arm to advance mobile device silicon. 

That refers to the integrated circuit chips specifically designed and optimized for use in mobile devices such as smartphones, tablets, smartwatches, and other portable electronic gear. These chips, commonly known as mobile system-on-chips, are responsible for processing and controlling these devices’ various functions.

Cadence Cleared Flat Base Buy Point

With their May 25 advance of 10.22%, Cadence shares cleared a flat base buy point above $217.67. 

Cadence stock built on its gains in the May 26 and May 30 sessions. Shares closed May 30 at $234.75, up $6.42 or 2.81% in heavy turnover.

The stock is currently out of buy range, as it’s nearly 8% above its buy point, and 12% above its 50-day moving average. However, after a fast run-up like this, some profit-taking is inevitable, even if it’s mild. A pullback with support at a moving average, including short-term lines like the 10-day or 21-day, could offer the next buying opportunity for Cadence.