Why Cadence Design Systems Rocketed Higher Today

Shares of semiconductor design software company Cadence Design Systems (NASDAQ:CDNS) were rallying on Tuesday, and up by 12.4% as of 2:55 p.m. ET.

Cadence is one of two major firms producing software that enables chipmakers to design semiconductors. With more and more companies now designing their own semiconductors, and with the major chip companies diversifying their offerings, Cadence made news Monday night by delivering a third-quarter report featuring accelerating growth and a strong forecast for even more in the current quarter.

Accelerating growth bringing Cadence's 2024 figures up to par

In the third quarter, Cadence's revenue grew by 19% to $1.215 billion, slightly beating expectations, but adjusted (non-GAAP) earnings per share rose by 30.2% to $1.64, smashing analysts' consensus expectation for $1.44.

That 19% growth was a big acceleration over the prior quarter's 9% increase, and well above the company's guidance. Management also forecast sequential growth for Q4 to $1.345 billion at the midpoint. That would amount to a 10.7% sequential growth and 25.8% growth over the prior-year period. Management also forecast further margin expansion: It anticipates an adjusted operating margin of 45.8% at the midpoint in Q4, up from an already-robust 45% in the third quarter.

Cadence shares had dipped somewhat over the summer due to the company's decelerating growth in the prior quarters. However, its Q3 results and management's strong guidance for Q4 are a reminder of just how lumpy Cadence's quarter-to-quarter growth figures can be. If it meets that guidance, it would lift its overall 2024 revenue growth back to around 14%, in line with the mid-teens growth percentages it has achieved since 2020.

AI network effect

On the earnings call, management touted the huge benefits artificial intelligence is bringing to Cadence, not only from a demand perspective but also for its internal use.

CEO Anirudh Devgan noted that Cadence's IP blocks, which the company designs for third-party chipmakers to use in their larger designs, have already seen big improvements thanks to its use of AI, infused with Cadence's software.

Thus, it appears AI is driving a virtuous circle for Cadence: Infusing generative AI into its platform produces better chips, leading to better AI, which can then produce even better chips, and so on.

So, the AI revolution appears to have the potential to keep Cadence's growth strong for years. That seems to justify the company's high valuation of 75 times earnings.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,217!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,153!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $403,994!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 28, 2024

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cadence Design Systems. The Motley Fool has a disclosure policy.