Why You Should Hold On To Cadence Design (CDNS) Stock For Now

Shares of Cadence Design Systems, Inc. (NASDAQ:CDNS) have been performing well of late. If you haven't taken advantage of the share price appreciation yet, its time you hold the stock in your portfolio as it looks promising and is poised to carry the momentum ahead.

Shares of Cadence have returned 69.9% in a year, substantially outperforming the industry's growth of 34.9%.

What's Going in Favor of Cadence?

Cadence is benefiting from ongoing adoption of its digital and signoff, custom-analog and IP solutions as well as expanding customer base.

Further, increasing investments on emerging trends like Internet-of-things (IoT), augmented and virtual reality (AR/VR) and autonomous vehicle sub-systems present significant growth opportunity for the company in the long haul.

Market research firm IDC estimates global IoT spending to grow at a CAGR of 15.6% over 2015-2020 time frame to hit $1.29 trillion in 2020. Moreover, the firm estimates AR/VR spending to accelerate at a CAGR of 198% over the same period to reach $143.3 billion in 2020. This presents significant growth opportunity for semiconductor chip makers as well as electronics sensor developers. We note that these two industries make the majority of customer base. We believe that the company’s expanding product portfolio will help it to win frequent orders as well as new customers from these emerging markets going ahead.

The company has also introduced a broad portfolio of interface and memory design IP solutions for automotive applications using TSMC's 16-nanometer FinFET Compact process. We note that the expansion of Renesas agreement reflects the company’s growing influence in the autonomous vehicle market. Of late, the company has won orders from well-known companies like MobilEye and Infineon who are developing advanced driver assistance systems (ADAS) related technologies. This is a prudent step given the significant growth prospect of the ADAS market, which is estimated to be worth $42.40 billion by 2021, according to data from MarketAndMarkets.

We also note that the company is focused on augmenting footprint in the aerospace and defense segment. Apart from having a dedicated team for the sector, Cadence has expanded systems business through partnerships with established sector players like Northrop Grumman (NYSE:NOC), BAE Systems (LON:BAES) and GE Aviation. We believe that these partnerships will help in driving the company’s market position in the long run.

Notably, the company posted a positive earnings surprise of 2.9% in the last quarter. Further, the company has a long-term expected EPS growth rate of 12%.

Risks Persist

However, intensifying competition, currency volatility, leveraged balance sheet and stretched valuation remain major headwinds.

We note that Cadence currently has a trailing 12 month P/B ratio of 12.17, which compares unfavorably with what the industry observed to some extent, in the last year. The ratio is higher than the average level of 11.38 and is closer to the high end of the valuation range. Hence, valuation looks slightly stretched from a P/B perspective.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Hence, we suggest that investors hold on to the stock at the moment.

Zacks Rank & Key Picks

Cadence carries a Zacks Rank #3 (Hold).

NVIDIA Corporation (NASDAQ:NVDA) , Western Digital Corporation (NASDAQ:WDC) and Analog Devices, Inc. (NASDAQ:ADI) are some better-ranked stocks in the same sector. All the three companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA, Western Digital and Analog Devices have a long-term earnings growth rate of 10.3%, 25.1% and 10.4%, respectively.

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