Cadence Design Systems (CDNS) Sees Increasing Adoption for its AI Portfolio

Stock (Symbol)

Cadence Design Systems (CDNS)

Stock Price

$244

Sector

Data is as of

Expected to Report

Company Description

Cadence Design Systems, Inc. is an electronic system designing company.

The Company’s Custom IC Design and Simulation offerings are used by its customers to create schematic and physical representations of circuits down to the transistor level for analog, mixed-signal, custom digital, memory and radio frequency (RF) designs.

Its Digital IC Design and Signoff solutions are used to create logical representations of a digital circuit or an integrated circuit (IC) that can be verified for correctness prior to implementation.

The Company’s Functional Verification products are used by its customers to verify that the circuitry or the software they have designed is consistent with the functional specification.

Its IP offerings consist of pre-verified, customizable functional blocks.

Its System Design and Analysis offerings are used by its customers to develop printed circuit boards (PCBs) and advanced IC packages and to analyze electromagnetic, electro-thermal and other multi-physics effects. Source: Refinitiv

Sharek’s Take

Cadence Design Systems (CDNS) is seeing increasing adoption for its AI portfolio which includes Cerebrus, an automated chip design platform, Verisium, an AI-powered verification platform, and Fidelity CFD Software, a multi-physics simulation program. Here’s more about each:

• Cerebrus is an automated chip design platform that uses machine learning to optimize the way chips are designed. Engineers can simply specify design goals and the platform will automatically optimize the workflow to meet power and performance objectives. Adoption for Cerebrus is accelerating and is now deployed at eight of the top 10 customers.
• Another AI-powered tool, Verisium, is also gaining traction as a verification platform for ensuring that electronic systems perform as intended.
• AI is also helping increase the adoption of Fidelity CFD Software, which is used for simulating and testing multi-physical properties in electronic systems. Optimization through generative AI technology helped Fidelity gain one large renewal, several new business wins, as well as increasing repeat orders. All of these contributed to a decent earnings report last qtr.

Cadence Design Systems was founded in 1988 with the merger of ECAD and SDA Systems, two startups in the electronic design automation (EDA) space. With 30 years of software expertise, Cadence has risen to become a leader in electronic system design. The company offers software, hardware, services, and reusable integrated circuit (IC) blocks to help customers develop complex electronic devices and systems, as well as conduct verification tasks to ensure that systems are working correctly. Partners include NVIDIA which is using Candence to accelerate EDA, system analysis, and AI, as well as Tesla which deploys Cadence solutions for the development of its Dojo AI supercomputer. Here are the company’s main segments:

• Custom IC Design and Simulation was 22% of revenues last qtr. Custom IC Design offerings help customers develop schematic designs and physical presentations of analog, digital, radio frequency, and mixed-signal ICs, which are then tested using simulation tools within the Virtuoso custom IC design platform.
• Digital IC Design and Signoff was 27% of total revenues, with revenue up 15%. Digital IC Design solutions help engineers create logical representations of an IC, which once verified, is converted to a format ready for silicon manufacturing. These solutions help engineers with logic design, physical implementation, and certification steps as part of the sign-off phase.
  • Design tools include the Joules RTL Design Studio to help designers access digital designs and debugging capabilities from a single, unified platform; and Genus Synthesis Solution, a synthesis engine used for converting a high-level code of a digital circuit into a gate-level netlist, which is the description of the circuit in terms of the individual logic gates.
• Functional Verification was 27% of revenues and was up by 27%. Functional Verification products ensure that an IC performs consistently with its functional specifications. Verification is done through the design process to minimize potential problems as much as possible before manufacturing.
  • Cadence’s Protium Verification Suite includes the JasperGold Format Verification Platform and the Xcelium Parallel Logic Simulation Platform for early-stage verification and the Palladium Enterprise Emulation Platform for more mature designs, usually before the manufacturing stage.
• Intellectual Property (IP) was 11% of revenues. IPs refer to pre-verified and reusable IC blocks that are made to accelerate the development process.
  • IP products include Tensilica configurable digital signal processors and solutions for high-speed Serializer/Deserializer, PCI, USB, and other standards.
• System Design and Analysis was 13% of revenues, with revenue up 23%. System Design and Analysis offerings help engineers develop entire printed circuit boards (PCB) and advanced IC Packages, as well as analyze the physical properties of a board.
  • Offerings include the Allegro System Design Platform for PCB authoring and implementation, IC package design, signal and power integrity analysis, and PCB library design management. There are also the OrCAD offerings for smaller teams of designers or individuals.
  • Analysis tools include Clarity 3D Solver for electromagnetic analysis and simulation, Celsius Thermal Solver for electrical-thermal analysis, and Fidelity CFD Software solution for multiphysics analysis.

CDNS has been an amazing stock this past decade as its climbed more than ten-fold in price the past decade. The stock was $13 or so ten years ago and is now almost $250. The stock has an Estimated Long-Term-Growth Rate of 18%. And the company seems to be growing profits at around that rate now. Management does not pay dividends but repurchased 6.6 million shares for $1 billion in fiscal 2022. CDNS on the radar for the Growth Portfolio. With a P/E of 46, the stock seems rich. I’d love the see the shares pull back to buy in.

One Year Chart

The stock has a P/E of 48, which is slightly above my Fair Value of 45. That seems high though. Looking at this chart, the stock was around $150 a year ago and made $4.27 for the year, so the P/E was ~35 then.

The Est. LTG is 18%. That’s a healthy growth rate.

Earnings Table

Revenue growth was led by Digital IC Design, Verification, and System Design. The company saw increased adoption for its Digital IC tools (revenue +15%), particularly for advance node and market-shaping customers. Secular demand for the company’s hardware platforms also drove revenues to the verification business (+27%). Growth in System Design (+23) was led by a multiyear agreement with Samsung Foundry.

Annual Profit Estimates for 2023 increased this qtr. Management raised their guidance for total revenue in fiscal 2023, but revenue is still expected to grow 14% year-over-year.

Qtrly Profit Estimates are 13%, 43%, 8%, and 17% for the next 4 qtrs. Analysts expect revenue to grow 11% next qtr. Management noted that a large number of hardware systems deliveries are scheduled for late September and early October, thus pushing back the majority of these deliveries in the last qtr of the fiscal year.

Fair Value

My

This stock seems to have around 6% downside for the year ahead.

Bottom Line

Cadence Design Systems (CDNS) has been a publicly traded company all the way back from 1998, but the stock only started growing at a faster pace in 2017 when it broke out at $30. The stock has been on an upward trajectory since and the stock has grown more than 7x since 2017.

This company has a bright future with AI. Investors are aware of this, thus the P/E is mighty high. But the valuation is high, and leaves little upside in the short-term.

CDNS is on the radar for the Growth Portfolio Power Rankings.

Power Rankings

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Aggressive Growth Portfolio

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Conservative Stock Portfolio

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