Cadence Design Systems Inc Continues to Hit Record Highs After Posting Strong Q4 Results

Cadence Design Systems Inc Continues to Hit Record Highs
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Cadence Design Systems Stock Up 44% in 2019

Cadence Design Systems Inc (NASDAQ:CDNS) has had great momentum since it reported strong fourth-quarter and year-end results in mid-February.

Before reporting its financial results, CDNS stock benefited from the January effect, advancing 23%. Since reporting its year-end results, the San Jose, California-based company’s share price has rallied an additional 17%, for a year-to-date gain of 44%.

There are concerns that Cadence Design Systems stock may, like the broader tech sector, be overvalued and headed toward a correction. There is certainly some evidence to support the idea that a correction is overdue.

In January, the S&P 500 increased nine percent while the Nasdaq rose 12%. The January effect is kind to stocks, but not that kind. Since 1950, January gains have averaged around one percent.

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Despite those strong gains, the markets have rallied even higher since then, with the S&P 500 up by about 13% year-to-date and the Nasdaq up approximately 18%. Both indexes have erased their December losses.

Those gains may be a little aggressive, what with fundamentals being somewhat poor. First-quarter earnings expectations are muted, with Wall Street expecting S&P 500 stocks to post a 3.4% earnings loss.

Meanwhile, 73 S&P 500 companies have issued negative earnings per share (EPS) guidance and 26 S&P 500 companies have issued positive EPS guidance. (Source: “Earnings Insight,” FactSet Research Systems Inc., March 1, 2019.)

A correction of some sorts in the second quarter wouldn’t be a total surprise. But because Cadence Design Systems Inc’s 2019 gains have come on the heels of strong financial results—not overblown, misguided investor optimism—if the CDNS stock price pulls back, it should be short-lived.

Cadence Design Systems Inc Overview

Cadence Design Systems is a chip-design software firm that makes system design enablement and electronic design automation software, as well as hardware for putting together electronic systems. (Source: “Company,” Cadence Design Systems Inc, last accessed March 28, 2019.)

The company’s customers use its products to design integrated circuits (ICs), printed circuit boards (PCBs), smartphones, laptop computers, and gaming systems. Its verification tools also test designs before going into production.

Cadence Design Systems Stock Information
Market Cap $17.6 billion
Beta 1.14
52-Week Change 71.08%
52-Week High $63.24
52-Week Low $35.49
Shares Outstanding 281.2 million
Float 275.6 million
50-Day Moving Average $57.42
200-Day Moving Average $47.62

(Source: “Cadence Design Systems, Inc. (CDNS),” Yahoo! Finance, last accessed March 28, 2019.)

CDNS stock traded in a tight range for much of the latter half of 2018. Then it broke out of this consolidation period at the end of January 2019.

Unlike many tech stocks, which benefited from the prolonged January effect, Cadence Design Systems Inc’s share price growth was actually fueled by strong financial results.

Again, Cadence Design Systems stock could experience some short-term profit taking and the broader markets could pull back, but it should rebound quicker than most stocks.

Chart courtesy of StockCharts.com

Cadence Design Systems Inc’s Results Topped the Wall Street Estimates

On February 19, Cadence announced its financial results for the fourth quarter and full-year 2018 under new rules that deal with the way revenue from contracts with customers is tallied. (Source: “Cadence Reports Fourth Quarter and Fiscal Year 2018 Financial Results,” Cadence Design Systems Inc, February 19, 2019.)

Fourth-quarter revenue was up 14% year-over-year at $570.0 million while earnings increased 33% to $98.0 million ($0.35 per diluted share). On an adjusted basis, earnings came in at $0.52. Wall Street was only expecting Cadence to report revenue of $551.0 million and adjusted earnings of $0.48.

For those more familiar with the old “ASC Topic 605” revenue rules, Cadence also reported its results under the old rules for an easier comparison.

Under those rules, fourth-quarter revenue increased by 15.3% year-over-year to $579.0 million. Fourth-quarter net income was $100.0 million ($0.36 per share), compared to a net loss of $14.0 million ($0.05 per share) on a diluted basis for the same period in 2017.

Adjusted net income was up approximately 30% at $144.0 million ($0.51 per share), compared to net income of $111.0 million ($0.39 per share) for the same period in 2017.

Total revenue for 2018 under the old ASC Topic 605 rules increased 10.4% to $2.1 billion. Net income advanced 72% year-over-year to $351.0 million ($1.25 per share), compared to 2017’s net income of $204.0 million ($0.73 per share).

Adjusted net income for 2018 was $528.0 million ($1.88 per share), a 34% increase over 2017’s adjusted net income of $393.0 million ($1.40 per share).

“Cadence achieved excellent operating results for 2018 as technology trends like AI, cloud/datacenter and 5G drove strong design activity,” said CEO Lip-Bu Tan. (Source: Ibid.)

For the first quarter of 2019, the company expects total revenue in the range of $565.0 to $575.0 million, with earnings per share in the range of $0.36 to $0.38. First-quarter adjusted net income per share is forecast to be in the range of $0.48 to $0.50.

For 2019, Cadence Design Systems expects total revenue to be $2.3 billion on adjusted earnings between $1.33 and $1.43.

Analyst Take

Cadence Design Systems Inc reported strong fourth-quarter and year-end results, easily beating Wall Street estimates. The company’s revenue and earnings were buoyed by strong demand across its entire product line, in particular its verification and digital design products.

Furthermore, Cadence provided increased guidance for the first quarter and fiscal 2019. Senior VP and CFO John Wall said, “I am pleased with our results and look forward to building on our success in 2019.” (Source: Ibid.)

Every investor likes to hear the CFO say they are pleased with their company’s financial results and are building on current successes. With Cadence Design Systems stock, that optimism is actually rooted in sound fundamentals and not broad-based investor enthusiasm.