Buy the Dip in This Semiconductor Stock for 23% Upside Potential

The semiconductor industry is the backbone of modern technology, underpinning the functionality of everything from handheld devices to sophisticated artificial intelligence (AI) systems. As devices grow more powerful and interconnected, chip design becomes essential. Electronic Design Automation (EDA) software is the key to crafting these intricate designs, making the process smoother and more accurate. The global EDA software market is estimated to climb $27.2 billion by 2034, expanding at an 8.5% CAGR.

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

CDNS stock has dipped nearly 18% from its June highs. However, with a new "Overweight" rating from Piper Sandler and significant upside potential, now might be the perfect moment for investors to consider buying this stock.

Let’s take a closer look.

About Cadence Design Stock

San Jose-based Cadence Design Systems, Inc. (CDNS) is a game-changer in electronic systems design, blending over 30 years of software expertise in computational software. Through its Intelligent System Design strategy, Cadence turns cutting-edge ideas into reality with top-tier software, hardware, and IP. 

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

CDNS stock is down about 17.9% from its June all-time high of $328.99, but it has still rallied about 18% over the past 52 weeks. And over the past five trading sessions, shares of the semiconductor design software maker have surged 8%, fueled by bullish forecasts from brokerage firms.

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

Cadence Beats Q2 Estimates

Cadence’s Q2 earnings results, released on July 22, beat Wall Street’s expectations on both the top and bottom lines. The company posted an 8.6% annual revenue increase to $1.06 billion, while non-GAAP net income per share climbed 4.9% to $1.28. Driven by strong customer demand, Cadence's backlog stands at $6 billion and the current remaining performance obligations hit $3.1 billion.

Cadence's design activity remains strong, fueled by game-changing trends like hyperscale computing, 5G, and autonomous driving, all supercharged by AI. As chip complexity grows, system companies are rapidly adopting Cadence’s solutions to build cutting-edge silicon, driving impressive momentum.

Plus, in Q2, Cadence deepened its ties with Nvidia Corporation (NVDA), using Palladium Z3 for AI advancements, and expanded with a major hyperscaler through Cadence.AI's broad EDA and hardware suite. The firm 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, boosting design efficiency. The collaboration surge, including Intel (INTC) and multiple foundries, enhances Cadence's IP offerings, driving growth in AI and HPC sectors.

For fiscal Q3, management projects revenues to range between $1.165 billion and $1.195 billion, and non-GAAP EPS is estimated between $1.39 and $1.49. The full-year outlook was mixed, as earnings arrived below estimates, while sales guidance was raised. Fiscal 2024 revenue is set to climb over 13% year over year to $4.60 billion and $4.66 billion, while EPS is projected to range between $5.77 and $5.97.

Analysts tracking Cadence predict EPS of $4.74 in fiscal 2024, up 19.7% annually, with the bottom line is projected to surge by another 20% to $5.69 in fiscal 2025.

What Led To The Pullback In July?

Shares of Cadence Design dropped over 13% in July, despite its better-than-expected Q2 results. The sell-off came as investors reacted to the company’s projected slowdown in revenue growth compared to previous years, and a lowered EPS forecast. 

Additionally, CDNS was swept lower by widespread weakness in tech stocks, as investors priced in concerns over lower AI spending across the board.

What Do Analysts Expect for Cadence Stock?

On Aug. 6, Piper Sandler analyst Clarke Jeffries upgraded CDNS stock to “Overweight” from “Neutral,” while keeping the price target unchanged at $318, which implies an upside potential of 19.3%.

Despite the modest Q2 results suggesting a slowdown in industry demand, the analyst believes Cadence’s YTD performance was hampered by specific challenges, like transitioning between verification generations and fluctuating China revenues. As these issues are resolved, Piper Sandler analyst expects Cadence’s business to look a whole lot better as verification deliveries ramp up in the coming quarters.

Given these projections, analyst Clarke Jeffries views Cadence Design as a core holding and sees the recent sell-off as a prime buying opportunity “in a premier software asset with an enviable position in the semi industry.”

CDNS stock has a consensus “Strong Buy” rating overall. Of the 13 analysts in coverage, 10 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining two say it's a “Hold.”

The mean price target for CDNS is $329.92, indicating an upside potential of 23.7% from current levels. The Street-high target price of $355, from analysts at KeyBanc, implies the stock could rally as much as 33.1%.