Buy This Semiconductor Stock at a Low for 23% Upside Potential

The semiconductor industry is the backbone of modern technology, underpinning the functionality of everything from wearable devices to advanced artificial intelligence (AI) systems. As devices become more powerful and connected, integrated circuit design becomes essential. Electronic Design Automation (EDA) software is key to creating these complex designs, making the process smoother and more accurate. The global EDA software market is expected to grow by $27.2 billion by 2034, growing at a CAGR of 8.5%.

As demand for advanced EDA software continues to grow, fueled by AI, 5G, and other technological breakthroughs, Cadence Design Systems, Inc. (CDNS) remains a key player at the forefront of semiconductor design. With its innovative tools, Cadence is poised to dominate an increasingly complex landscape.

CDNS stock is down nearly 18% from its June highs. However, with a new “Overweight” rating from Piper Sandler and significant upside potential, now could be the perfect time for investors to consider buying this stock.

Let’s take a closer look at this.

About Cadence Design Stock

Cadence Design Systems, Inc. (CDNS), headquartered in San Jose, is a game-changer in electronic systems design, combining more than 30 years of experience in computational software. Through its Intelligent System Design strategy, Cadence transforms cutting-edge ideas into reality with state-of-the-art software, hardware, and IP.

Cadence’s software and tools help companies create cutting-edge semiconductors, crucial in the AI ​​era and amid the growing trend of cloud giants building their own chips. With a market capitalization of $73.6 billion, Cadence drives innovation across industries from 5G to aerospace, and its revenue has skyrocketed as technology advances.

CDNS stock is down about 17.9% from June’s all-time high of $328.99, but is up about 18% over the past 52 weeks. And over the past five trading sessions, shares of the semiconductor design software maker are up 8%, buoyed by bullish outlooks from brokerage firms.

Cadence trades at 45.90x forward earnings, roughly in line with peer Synopsys (SNPS) as well as its own long-term averages — but well above most other tech names. Both stocks are valued well above the tech sector median on a price/sales basis, too, as investors appear to value their EDA expertise at a premium.

Cadence Beats Q2 Estimates

Cadence’s second-quarter results, released July 22, beat Wall Street expectations in both revenue and earnings. The company reported an 8.6% year-over-year increase in revenue to $1.06 billion, while non-GAAP net income per share rose 4.9% to $1.28. Driven by strong customer demand, Cadence’s backlog is $6 billion, and current outstanding performance commitments reached $3.1 billion.

Cadence’s design activity remains strong, driven by game-changing trends like hyperscale computing, 5G, and autonomous driving, all supercharged by AI. As IC complexity increases, systems companies are rapidly adopting Cadence solutions to build cutting-edge silicon, fueling impressive momentum.

Additionally, in the second quarter, Cadence deepened its relationship with Nvidia Corporation (NVDA), leveraging the Palladium Z3 to advance AI, and expanded into a major hyperscaler through Cadence.AI’s broad EDA and hardware suite. The company also strengthened partnerships with Samsung and Taiwan Semiconductor Manufacturing Company (TSM), optimizing tools for advanced processes. Cadence’s Integrity platform now supports TSMC’s 3D-IC and Samsung’s multi-die integrations, increasing design efficiency. Expanded partnerships, including Intel (INTC) and multiple foundries, strengthen Cadence’s IP offering, driving growth in the AI ​​and HPC sectors.

For the fiscal third quarter, management is forecasting revenue in a range of $1.165 billion to $1.195 billion, with non-GAAP earnings per share estimated at $1.39 to $1.49. Guidance for the full year was mixed, as earnings came in below estimates and sales guidance was raised. Fiscal 2024 revenue is expected to increase more than 13% year over year to $4.60 billion and $4.66 billion, while earnings per share are expected to be between $5.77 and $5.97.

Analysts following Cadence are forecasting earnings per share of $4.74 in fiscal 2024, up 19.7% year over year, and net income will increase another 20% to $5.69 in fiscal 2025.

What led to the withdrawal in July?

Cadence Design shares fell more than 13% in July despite better-than-expected second-quarter results. The sell-off came as investors reacted to a projected slowdown in the company’s revenue growth compared with previous years and a lowered EPS forecast.

Additionally, CDNS shares fell amid a broad-based weakening in tech stocks as investors priced in concerns about lower spending on artificial intelligence.

What do analysts expect from Cadence stock?

On August 6, Piper Sandler analyst Clarke Jeffries raised CDNS stock rating from “Neutral” to “Overweight” while keeping his price target unchanged at $318, implying 19.3% upside potential.

Despite modest Q2 results suggesting a slowdown in industry demand, the analyst believes Cadence’s YTD results were held back by specific challenges, such as the transition between verification generations and revenue fluctuations in China. Once those issues are resolved, the Piper Sandler analyst expects Cadence’s business to look much better as verification shipments pick up in the coming quarters.

Given these forecasts, the Clarke Jeffries analyst views Cadence Design as a key position and sees the recent sell-off as a great opportunity to buy “a leading software asset with an enviable position in the semiconductor industry.”

CDNS stock has an overall consensus rating of “Strong Buy.” Out of the 13 analysts surveyed, 10 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining two say it’s a “Hold.”

The average price target for CDNS is $329.92, indicating a potential upside of 23.7% from current levels. The Street-high price target of $355, according to analysts at KeyBanc, means the stock could rise as much as 33.1%.

On the date of publication, Sristi Suman Jayaswal did not hold (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For further information, please refer to Barchart’s Disclosure Policy here.