Is Cadence Design Systems Stock A Buy?

Cadence Design Systems Inc (NASDAQ:CDNS) isn’t the first name you think of for hardware and software technologies. But it’s one of the largest integrative circuit and process control block companies in the world. In fact, its products are used by nearly every semiconductor and electronic systems provider in business today.

Its products are so widely used that you have to wonder is Cadence Design Systems stock a Buy?

The company’s biggest revenue stream is in electronic design automation (EDA) products that assist in computer-aided design and engineering (CAD/CAE) of electronics. As computer chips got smaller and manufacturers needed more transistors to fit on them, Cadence’s design automation software became critical.

Moving into the 2020s, it’s an industry leader in electronic design. Companies like Samsung, IBM (IBM), Agilent Technologies (A), and Sun Microsystems all trust the company’s platform to design their own equipment and components.

Of course, it wasn’t easy to get here. Cadence had a decade-long dispute with rival Avanti Corp. Each accused the other of stealing their source code, and Cadence was awarded hundreds of millions of dollars in restitution.

Cadence Design Systems 101

Cadence Design Systems designs, markets, and services enterprise computational software used in high-tech manufacturing.

Its CAD/CAE platform is responsible for the creation of silicon chips, motherboards, and other electronic components used in the Internet of Things, artificial intelligence, 5G communications, aerospace, automotive, healthcare, and other industrial applications.

This is used by leading technology companies to design consumer electronics, wearables, smart appliances, self-driving cars, smartphones, and more.

The company’s hardware, software, and intellectual property (IP) is saturated in the backend of the technology market. While you may not be familiar with the company’s products, it was likely used to create your favorite product.

It’s the Pro Tools of back-end hardware engineering, and its tools are widely used in the semiconductor and electronics systems markets.

Because it works in the beginning of the supply chain, sales skyrocketed when the pandemic pushed a rush to digital. In addition, multiple new releases hit the market during the 2020 holiday season, including new video game consoles, VR headsets, smartphones, and computer components.

Many, arguably most, likely used Cadence Design Systems products or IP to reach end-users’ hands.

Its components are widely bought, but is its stock?

Is Cadence Design Systems Stock A Buy?

Cadence Design Systems had a market capitalization most recently of over $38 billion, and traded at an earnings multiple of 35x.

Although CDNS share price crashed to a 52-week low of $51.39 when the stock market took a nosedive, it bounced back well in tandem with the broader indices.

The company’s third quarter 2020 earnings report showed $667 million in revenue, an increase from $580 million in the same quarter of 2019. With a 25 percent operating margin, it earned net income of $162 million for the quarter.

CEO Lip-Bu Tan explained on that earnings call that the company’s Board of Directors repurchased $75 million of its common stock, with $869 million total authorized to be repurchased according to market conditions.

Its year-end revenue for 2020 was over $2.6 billion, which equates to about $2.00 GAAP-adjusted earnings per share (EPS).

The company grew to its current size through a series of mergers and acquisitions that built a large cache of IP. It grew revenue about 33 percent from 2016 through 2020, but it could face problems moving forward past the crisis in 2022 and beyond.

Will Cadence Stock Drop?

Although demand for integrated circuits, chips, and circuit boards rose when the world became more virtual and digitized, the trend is unlikely to continue at the same rate. Analysts are split between how the market will recover in the 2020s as a whole.

Some believe 2021 will signal a return to normalcy causing tech-related stocks to cool. This market perception could certainly hinder Cadence, no matter how well the business is doing.

Others believe the accelerated movement toward digitalization will move rapidly towards further virtual interactions. Even when the economy returns to normal, it may be a new normal that necessitates all the technology being used.

Should demand for its businesses shrink, Cadence needs to find new ways to generate revenue. It’s a heavy tech play, and that gave it the benefit of rising alongside its heavy-hitting tech clientele. But their downfall would also be a decline for this company.

On top of this, major manufacturers like Apple (AAPL), Microsoft (MSFT), and Google (GOOG) are already trying to reduce their need for IP licensing fees paid to companies like Qualcomm (QCOM) by bringing their manufacturing in-house. This trend could eventually lead to software design of chips being brought “in-house” too.

Though the odds are that would take years, and the titans of Silicon Valley technology may be more likely to acquire the IP from Cadence then to start building chip design software from scratch.

Cadence also has to worry about competitors nipping at its heels.

Can Cadence Design Systems Competitors Win?

Cadence Design Systems has several competitors in its intelligent design and design automation categories.

These include Agilent (A), Ansys (ANSS), Synopsys (SNPS), and Keysight Technologies (KEYS). Each company is attempting to grow its own business, which could eat into market share and growth potential.

However, it does have a firm foothold in its business, and it’s more likely to lose out by not innovating into new sectors as its clientele cut costs and eat into its overhead.

Is Cadence Design Systems Stock A Buy? 

Cadence Design Systems is an industrial technology company whose intelligent design platform is widely used in the tech industry. It’s an industry leader at the beginning end of the supply chain, assisting in the design of semiconductors, circuit boards, and integrated circuits used in a wide range of applications.

The accelerated transition towards technology solutions and virtualization created a rush for its products, as companies pushed for a virtual future. Whether that future is here to stay and can continue growing remains to be seen. 

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