Company Overview: Cadence Design Systems Inc. (NASDAQ: CDNS) is engaged in offering solutions that help customers to design complex and new electronic products. The company offers hardware and software through its System Design Enablement (SDE) to electronic system providers and semiconductor customers.

CDNS Details

CDNS Rides on Geographic Expansion & Strategic Alliances: Cadence Design Systems, Inc. (NASDAQ: CDNS) is engaged in providing software, hardware, services, as well as reusable integrated circuit (IC) design blocks. The market capitalization of the company as on 28 May 2021 stood at ~35.34 billion. The company has reported a robust 1QFY21 results, thanks to the solid impetus of Palladium Z1, CloudBurst Platform and Clarity 3D Solver offerings. Talking about the company’s quarterly performance, it reported earnings per share on a non-GAAP basis of 83 cents per share, up from 60 cents per share reported in the year-ago period. Revenues depicted an increase of ~19% year over year and stood at ~736 million in 1QFY21, owing to higher revenues from Product & Maintenance (up 20% on pcp) and Services segment (up by 2.8% YoY). A stable approach to organic and inorganic growth persists to benefit the company’s top-line.

Further, the company’s strong channel of digital & sign-off, custom & analog, and IP solutions are expected to auger well for the company’s financial performance, going forward. The company has raised its outlook for FY21 as it expects revenues to be in the ambit of $2.88-$2.93 billion, up from the prior guidance of $2.86-$2.92 billion, depicting an increase of ~7.7% on pcp. CDNS now expects non-GAAP earnings to be in the range of $2.99-$3.07 per share, up from the prior outlook of $2.95-$3.05 per share.

The company’s total revenue and gross profit came in at $736 million and $652.1 million, respectively, in 1QFY21. This depicts a rise from $618 million of revenues and $543.5 million gross profit reported in 1QFY20. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach. On a geographical basis, revenue contributions from Americas, China, Other Asia, Europe, Middle East, and Africa (EMEA) and Japan were 46%, 12%, 18%, 18% and 6%, respectively, in 1QFY21.

Key Trends; Analysis by Kalkine Group

Collaboration Remains a Key Growth Strategy: CDNS recently expanded its strategic alliances with Taiwan Semiconductor Manufacturing Company (TSMC) to accelerate its Cloud services portfolio (which includes mobile, hyperscale computing application and artificial intelligence) development on TSMC’s N3 and N4 process technologies. TSMC’s process technologies will support the Cadence Intelligent System Design™ strategy to provide users with an enhanced platform having robust scalability, productivity, flexibility, and security features. Further, it will assist customers to achieve SoC (System on Chip) design excellence.

On May 25, 2021, CDNS announced collaboration with Arm’s new mobile solution, which includes the Arm Cortex®-X2, Cortex-A710, and Cortex-A510 CPUs, Mali™-G710 GPU and the DynamIQ Shared Unit-110. The strategic alliance has successfully taped out SoCs for mobile devices utilizing the CDNS digital & signoff, and verification, thus enabling customers to hasten time to tape-out and attain optimal power, performance, and area (PPA).

To conclude, the company remains focused on delivering broad-based solutions, which quickly reduce the time necessary to launch a product in the market. Furthermore, recent collaborations with leading vendors bode well for the company’s top-line growth. Also, rising investments on developing trends like augmented and virtual reality, Internet-of-things ("IoT"), and autonomous vehicle sub-systems represent substantial expansion prospect for the company in the long-term.

Decent Liquidity Position of CDNS to Boost Investor’s Portfolio: Investors should keep in mind that accumulating cash might be a great plan in the short run as cash-rich companies face a lesser amount of downside risk in a market sell-off. A stable cash flow and robust balance sheets position the company to stand strong in the time of rising rate worries and record growth in the current environment. Thus, a cash-rich company is slightly dependant on cheap money. CDNS being a cash-rich company ensures rewards to shareholders from its deep cash balances. The company exited Q1FY21 with cash and cash equivalents of ~$743 million, with long-term debt amounting to $347 million. Operating cash flow in 1QFY21 stood at $208 million, up from $136 million reported in 4QFY20. Free cash flow stood at $191 million in 1QFY21, up from $105 million in 4QFY20.

Cash Position; Analysis by Kalkine Group

Key Metrics: In 1QFY21, the company’s EBITDA margin stood at 32.6%, higher than the industry median of 7.4%, indicating higher profitability. In the same time span, net margin and operating margin of the company stood at 25.4% and 27.7%, higher than the industry median figure of -4.3% and -1.3%, respectively. During the quarter, ROE of the company stood at 7.4% as compared to the industry median of -0.7%. In 1QFY21, debt to equity ratio of the company was 0.14x, as compared to the industry median of 0.37x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form ~41.73% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. and MFS Investment Management are holding a maximum stake in the company at 11.39% and 7.83%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the flip side, pricing pressure continues to remain a major headwind for CDNS. Further, stiff competition from peers adds to the woes. Furthermore, coronavirus-caused economic downturn may limit the spending from semiconductor companies on software model solutions, which remains a concern. Also, rising investments on portfolio expansion and product developments are expected to weigh on the company’s margins.

Outlook: The company remains on track to bolster its foothold in the emerging markets, thus proposing long-term opportunities. Also, the company’s cost-cutting implementations are anticipated to partially offset the impact of COVID-19 led uncertainties. Additionally, strong adoption of the CDNS’ latest Clarity 3D Solver solution by companies like Ambarella augers well for the company’s performance. For 2QFY21, CDNS expects revenues and non-GAAP earnings to be in the range of $705-$725 million and 74-78 cents per share, respectively. For FY21, operating cash flow is expected to be in the range of $900-$950 million. CDNS anticipates using 50% of free cash flow generated to buy back shares in FY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~3.6%. The stock made a 52-week low and high of $84.77 and $149.08, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at some discount as compared to its peer’s average, considering the volatility in the market, pricing pressure, adverse currency translations, and forex headwind. For the purpose, we have taken peers like Synopsys Inc (NASDAQ: SNPS), Keysight Technologies Inc (NYSE: KEYS), to name a few. Considering decent 1QFY21 performance, collaboration synergies, robust product adoption, encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $126.99, down by ~0.11% on 28 May 2021. 

CDNS Daily Technical Chart, Data Source: REFINITIV

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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