Wolfe Cuts Price Target on Cadence Design Systems to $290 From $320, Maintains Outperform Rating

Cadence Design Systems CDNS reported better-than-expected fourth-quarter 2024 results, driven by broad-based customer demand amid robust design activity. Revenues of $1.36 billion increased 26.9%, while non-GAAP earnings per share (EPS) of $1.88 improved 36.2% on a year-over-year basis. Both top and bottom lines also exceeded management’s guidance.

See the Zacks Earnings Calendar to stay ahead of market-making news.

Broad-based demand for its solutions amid robust design activity is a key catalyst. Secular trends like 5G, increasing usage of hyperscale computing and autonomous driving are influencing design activity across semiconductor and systems companies. This is likely to open up opportunities for its end-to-end EDA, IP and systems solutions. Going ahead, the company is likely to benefit from customers increasing their R&D spending in artificial intelligence (AI) driven automation.

Cadence Design Systems, Inc. Price, Consensus and EPS Surprise

Cadence Design Systems, Inc. price-consensus-eps-surprise-chart | Cadence Design Systems, Inc. Quote

The company highlighted that the AI super cycle was now entering a new phase. The focus on Generative AI, Agentic AI and Physical AI is leading to an exponential increase in computing demand and semiconductor innovation. It has been collaborating with several tech giants, including Qualcomm and NVIDIA, on their next-generation AI designs across both training and inferencing. It is eyeing new AI markets like Life Sciences through its OpenEye drug discovery software. The company is also expanding partnerships with its foundry partners like Taiwan Semiconductor Manufacturing, Intel and Arm Holdings.

The verification business is gaining traction due to the rising complexity of system verification and software bring-up. In April 2024, the company unveiled the latest Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems. This is an advanced digital twin platform that is aimed at addressing the growing complexity of system and semiconductor design. The latest systems offer more than double the capacity and a significant performance increase compared with Palladium Z2 and Protium X2 systems. In 2024, hardware solutions added more than 30 customers and almost 200 repeat customers, especially among AI and hyperscale clients.

Despite this, shares are down since reporting results on Feb. 18. The stock's post-earnings drop has raised concerns among investors about whether this is a buying opportunity or a warning sign.

Why CDNS Shares Fell After Earnings Results

CDNS provided soft guidance for 2025, leading to a stock price decline of 10% since reporting results on Tuesday. For 2024, CDNS reported revenue and EPS growth of 13.5% and 15.9%. However, for 2025, revenues are expected to increase in the range of 11-12%, while non-GAAP EPS growth is projected to be 12%.

Revenues for 2025 are estimated to be in the range of $5.14-$5.22 billion, while the Zacks Consensus Estimate is currently pegged at $5.19 billion. Non-GAAP EPS for 2025 is expected to be between $6.65 and $6.75 compared with the Zacks Consensus Estimate of $6.80 per share.

China’s revenue growth is expected to be flat in 2025. In 2024, China revenues registered a decline of $100 million.

Apart from that, weakness prevailing over global macroeconomic conditions and substantial exposure to the semiconductor vertical is concerning. Any reduction in R&D spending for companies within the semiconductor sector could affect CDNS' performance.

Higher operating costs and stiff competition in the EDA space from the likes of Keysight Technologies KEYS, Synopsys SNPS and ANSYS ANSS are additional headwinds. The pending acquisition of ANSYS by Synopsys is likely to intensify competition in the EDA space for all players.

CDNS Stock Price Performance

CDNS stock has declined 10.2% year to date. It has underperformed its industry and the broader technology sector. Within the same time frame, the Computer-Software industry and the Zacks Computer and Technology sector have gained 0.5% and 2%, respectively. It also lags the S&P 500’s growth of 4.3%. In the same time frame, KEYS, SNPS and ANSS have gained 15.1%, 1.8% and 0.9%, respectively.

Declining Earnings Estimate Revisions for CDNS

Analysts are bearish about the stock, which is evident from the downward revision in earnings estimates.

In the past 60 days, analysts have decreased their earnings estimates for the current quarter a by 0.6% to $1.56.

CDNS Premium Stock Valuation & Bearish Technical Indicators

Cadence’s stock is trading at a premium, with a forward 12-month Price/Earnings of 39.04X compared with the industry’s 31.22X. Though the lofty valuation reflects high expectations for future growth, the near-term prospects of the company remain somewhat muddled.

CDNS also trades below its 50 and 100-day moving averages, suggesting a short and medium-term bearish signal and a possible downward movement.

What to Do With CDNS Stock?

While Cadence delivered strong growth in 2024, several potential risks could exert downward pressure on its stock. Macroeconomic and geopolitical uncertainties, particularly in China, competitive pressures and significant exposure to semiconductor verticals all pose significant challenges.

The potential for margin compression due to high investments in AI and research and development further adds to investors’ concerns. Non-GAAP operating margin is estimated to be between 40% and 41% for the first quarter of 2025, while CDNS reported an operating margin of 46% in the fourth quarter of 2024.

To conclude, investors interested in CDNS stock should wait for a better entry point as the stock currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Zacks Investment Research