CDNS Gains 24% in Three Months: Where Will the Stock Head From Here?

Cadence Design Systems CDNS stock has rallied 23.8% over the past three months. The stock closed last trading session at $322.66 and is now closer to its 52-week high of $330.09.  

So, the question now arises is whether to stay invested or pull out? Can the stock rally further? Let us analyze the stock in detail to ascertain if it is worth investment consideration.

Riding the AI Momentum

AI is proving to be a pivotal shift for semiconductor and system design. Secular trends like 5G, increasing usage of hyperscale computing and autonomous driving are also influencing design activity across semiconductor and systems companies.

The focus on Generative AI, Agentic AI and Physical AI is leading to an exponential increase in computing demand and semiconductor innovation. This bodes well for Cadence. To capitalize on this opportunity, it has been collaborating with several tech giants, including Qualcomm and NVIDIA, on their next-generation AI designs across both training and inference. Cadence is eyeing new AI markets like Life Sciences through its OpenEye drug discovery software. The company is also expanding partnerships with its foundry partners like Taiwian Semiconductor Manufacturing, Intel and Arm Holdings.

Going ahead, the company is likely to benefit from customers increasing their R&D spending in AI-driven automation. On the last earnings call, Cadence highlighted that it has not seen any shifts in customers’ behavior presently, as they continue to invest in next-generation designs.

Cadence’s ratable software model, strong backlog and high mix of recurring revenues are other positives.

CDNS’ Verification Business Is Going Strong

Cadence’s verification business is gaining traction due to the rising complexity of system verification and software bring-up. In April 2024, the company unveiled the latest Palladium Z3 Emulation and Protium X3 FPGA Prototyping systems. This is an advanced digital twin platform that is aimed at addressing the growing complexity of system and semiconductor design. The latest systems offer more than double the capacity and a significant performance increase compared with Palladium Z2 and Protium X2 systems. In 2024, hardware solutions added more than 30 customers and almost 200 repeat customers, especially among AI and hyperscale clients.

Demand for the new hardware systems, especially among AI and hyperscale clients, was the primary catalyst behind Core EDA’s business (which constitutes Custom IC, Digital IC and Functional Verification businesses) performance. Core EDA revenue grew 16% year over year in the first quarter.

CDNS’ IP Business on a Tear

The IP business benefited owing to increasing demand for solutions in AI, HPC, foundry ecosystem buildout and chiplet use cases, with revenues from the segment up 40% year over year in the first quarter.

To strengthen IP business, the company announced the acquisition of Secure-IC, which will expand its IP portfolio, including interface, memory, AI and DSP solutions. In April 2025, Cadence signed a definitive agreement with Arm Holdings to acquire its Artisan foundation IP business. The acquisition includes a suite of standard cell libraries, memory compilers and general-purpose I/Os, all finely tuned for advanced process nodes at leading global foundries.

CDNS’ Robust Outlook

Driven by strong results, management upgraded its outlook for 2025. Revenues for 2025 are now estimated to be in the range of $5.15-$5.23 billion compared with $5.14-$5.22 billion guided earlier. Nonetheless, stiff competition in the EDA space, broader market volatility amid tariff troubles and high operating costs remain woes.

Non-GAAP EPS for 2025 is expected to be between $6.73 and $6.83 compared with $6.65-$6.75 guided earlier. Non-GAAP operating margin for 2025 is forecasted to be in the range of 43.25% to 44.25% compared with 42.5% reported in 2024.  Also, operating cash flow is expected to be between $1.6 billion and $1.7 billion.

For the second quarter of 2025, revenues are estimated to be in the $1.25-$1.27 billion band. The company reported sales of $1.06 billion in the year-ago quarter. Non-GAAP EPS for the second quarter is anticipated to be between $1.55 and $1.61. It reported an EPS of $1.28 in the year-ago quarter. 

Strong Cash Flow and Repurchases

Cadence generated an operating cash flow of $487 million in the reported quarter compared with the prior quarter’s $441 million. Free cash flow was $464 million compared with $404 million in the previous quarter.

The company repurchased its shares worth $350 million in the first quarter. Cadence expects to execute $175 million in repurchases in the second quarter and utilize at least 50% of its free cash flow to repurchase shares in 2025.

CDNS’ Premium Valuation a Concern?

Cadence stock is trading at a premium, with a forward 12-month Price/Earnings ratio of 44.49X compared with the Zacks Computer-Software industry’s 34.37X. The valuation is justified to an extent given the company’s strong secular tailwinds from AI, 3D-IC, and digital transformation and high mix of recurring revenues.

Conclusion: Buy CDNS Stock

Cadence, with its strong fundamentals, robust AI-driven demand and a resilient recurring revenue model, remains a compelling opportunity. The company’s prominent position in the EDA space and strategic partnerships with tech giants like NVIDIA and Qualcomm position it well for long-term growth. While macro uncertainty and stretched valuation are valid concerns, the company's upgraded guidance and expanding market footprint support a continued bullish outlook.

CDNS currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other stocks worth consideration with the same industry space are Intuit Inc. INTU, Microsoft Corporation MSFT and ACI Worldwide, Inc. ACIW. INTU sports a Zacks Rank #1 (Strong Buy), while MSFT and ACIW carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for INTU’s fiscal 2025 earnings is pegged at $20.06, unchanged in the past seven days. Intuit’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 12.15%. Its shares have soared 21.9% in the past six months.

The Zacks Consensus Estimate for MSFT’s fiscal 2025 earnings is pegged at $13.36, unchanged in the past seven days. Microsoft’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 5.21%. The company’s long-term earnings growth rate is 14.8%. Its shares have advanced 20.2% in the past six months.

The Zacks Consensus Estimate for ACIW’s 2025 earnings is pegged at $2.83, unchanged in the past seven days. ACI Worldwide’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 66.64%. Its shares have declined 12.7% in the past six months. 

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This article originally published on Zacks Investment Research (zacks.com).

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