Cadence Stock Gaining from the AI Push
Today’s stock represents another of my favorite strategies for investing in emerging technologies. I select companies that are at the forefront of providing products and services for a game-changing technology.
The technology in focus today is artificial intelligence (AI), which has taken the world by storm as it promises a revolution in the way we work and live. Although AI is still in its early stages, by investing in firms that are developing expertise in this area, investors stand to reap above-average returns.
A case in point is Cadence Design Systems Inc (NASDAQ:CDNS), which makes software and other tools to build AI-enabled chips. Its products and services enable its customers to design complex and innovative electronic products.
With the rise of new categories of electronic systems such as augmented reality (AR), virtual reality (VR), the Internet of Things (IoT), and autonomous vehicle sub-systems, there will be no dearth of growth opportunities for the company.
There are a few good reasons to be optimistic about CDNS stock, which is trading near its record highs at present.
With the increasing use of AI in our day-to-day electronic gadgets, companies are focusing on developing circuits dedicated to AI technology. As we move toward a world of chips that are customized for AI tasks, companies like Cadence will likely be big gainers as they focus on developing the tools and software used to design such chips.
Chip giants like Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA) are making bigger and more complex chips, and smartphone maker Apple Inc. (NASDAQ:AAPL) is developing circuitry dedicated to AI-style tasks for the “iPhone.”
As per research by Allied Market Research, the AI market size is expected to reach around $20.0 billion by 2022, which translates into a compound annual growth rate (CAGR) of 45.4% from 2016 to 2022. (Source: “Artificial Intelligence Market by Technology…Global Opportunity Analysis and Industry Forecasts, 2014 – 2022,” Allied Market Research, last accessed October 23, 2017.)
These developments bode well for the makers of electronic design automation (EDA) software tools like Cadence, which enables its customers to design electronic systems, integrated circuits (ICs), and increasingly sophisticated manufactured products, helping them deliver smartphones, laptop computers, gaming systems, automobiles, networking products, etc.
As these devices become more sophisticated, Cadence’s position gets better as it builds the set of software algorithms and applications that are required for the design of complex next-generation semiconductors and electronic products.
The strong demand for its products is reflected in the strong results posted by the company. Its second-quarter results were impressive, with total revenue reported at $479.0 million, as compared to $453.0 million reported for the same period last year. Asia is the fastest growing region for the company, with revenue up 18% year-over-year. (Source: “Cadence Reports Second Quarter 2017 Financial Results,” Cadence Design Systems Inc, July 24, 2017.)
Cadence is focused on its system design enablement (SDE) strategy, which offers additional growth opportunities as the company expands beyond semiconductors and taps into significantly larger markets with systems companies and vertical market segments, such as automotive, aerospace, and defense.
Consistent execution drove excellent financial results for Q2, with revenue near the high end of its guidance range and operating margins, earnings per share (EPS), and operating cash flow all exceeding expectations.
Cadence stock has gained more than 230% over the last five years and about 65% in the last year. The following stock chart shows this phenomenal rise.
Chart courtesy of StockCharts.com
Given the rising number of innovative electronic products and applications in VR, the IoT, and autonomous vehicles—for which the company’s solutions would be required—CDNS stock is likely to post similar gains in the coming years.
Cadence stock seems to be a good play on the rise of AI, and it should continue to benefit from the rise of complexity in the chips designed for the future.
The semiconductor industry is changing fast, which presents a lot of opportunities for a vendor like Cadence Design Systems. As CDNS stock is trading near record highs at present, investors could consider building a position on the dips.