Cadence Design Systems (CDNS): Is It Time to Buy?
Cadence Design Systems CDNS has recently captured attention on Zacks.com’s list of most searched stocks, making it a topic of interest for investors. So, what are the key factors influencing its performance, and where might the stock head in the near future?
Key Takeaways:
- Cadence‘s stock has dipped -15.9% over the past month, lagging behind the Zacks S&P 500 composite’s -0.2% change.
- Earnings estimates play a crucial role in stock valuation, as they reflect the expected future profitability of a company.
- While Cadence‘s earnings estimates have shown some recent downward revisions, its current Zacks Rank #3 (Hold) suggests potential for inline performance with the broader market.
- Revenue growth forecasts are optimistic, with projections indicating consistent year-over-year increases.
- Valuation metrics suggest Cadence might be trading at a premium to its peers, indicating potential overvaluation.
A Deeper Dive into Cadence’s Performance
While media hype can sometimes drive stock movements, it’s crucial to evaluate the underlying fundamentals for a long-term investment strategy. To this end, Zacks.com prioritizes the impact of earnings estimate revisions on stock valuations.
Earnings Estimate Revisions: A Key Indicator
Analysts covering a stock adjust their earnings estimates to reflect current business trends and anticipate future performance. Upward revisions point to a positive outlook, potentially driving investor interest and stock price appreciation.
For Cadence, the following earnings estimates are in place:
- Current Quarter: Earnings are expected at $1.46 per share, up 15.9% from the year-ago quarter. However, the Zacks Consensus Estimate has been revised downward by -13.6% over the past 30 days.
- Current Fiscal Year: The consensus earnings estimate of $5.88 suggests a 14.2% increase from the previous year. This estimate has been adjusted slightly downward by -0.7% over the last 30 days.
- Next Fiscal Year: The consensus earnings estimate of $6.92 points to a 17.6% increase from the prior year. The estimate has also been slightly adjusted downward by -0.9% over the past month.
While these estimates indicate potential for continued growth, the recent downward revisions suggest caution.
The Zacks Rank is a proprietary tool that analyzes earnings estimate revisions and other factors to provide a conclusive picture of a stock’s near-term price direction. Cadence currently holds a Zacks Rank #3 (Hold), suggesting potential for performance in line with the broader market.
Revenue Growth: A Vital Component
While earnings growth is a strong indicator of a company’s financial health, sustained revenue growth is crucial for long-term success. Without increasing revenue, it’s difficult for a company to consistently grow its earnings.
Cadence has a positive outlook for revenue growth:
- Current Quarter: The consensus sales estimate of $1.18 billion indicates a 15.7% year-over-year increase.
- Current Fiscal Year: The estimated $4.62 billion in sales reflects a 13% increase.
- Next Fiscal Year: A projected $5.22 billion in sales translates to a 13% increase.
These projections suggest that Cadence is well-positioned for continued revenue growth, supporting a positive long-term outlook.
Recent Results and Surprise History
Cadence reported $1.06 billion in revenue for the last quarter, an 8.6% year-over-year increase. Earnings Per Share (EPS) came in at $1.28, up from $1.22 a year ago.
These results were in line with expectations, surpassing the Zacks Consensus Estimate of $1.05 billion in revenue by 1.17% and exceeding EPS estimates by 4.07%. Cadence has consistently beaten EPS estimates in the last four quarters and has surpassed revenue estimates three times over that period.
Valuation: A Point of Consideration
Valuation metrics are crucial in assessing whether a stock’s current price reflects its intrinsic value and growth prospects. Comparing a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its historical values and those of its peers provides valuable insights.
The Zacks Value Style Score analyzes both traditional and unconventional valuation metrics to assess whether a stock is overvalued, fairly valued, or undervalued. Cadence has a Value Style Score of F, indicating a potential premium valuation compared to its peers.
Conclusion
While Cadence‘s recent stock price performance has been challenging, its revenue growth forecasts and earnings expectations remain positive. However, the downward revisions to earnings estimates and the premium valuation suggest caution.
Investors should carefully assess their individual investment goals and risk tolerance before making any investment decisions. Cadence‘s Zacks Rank #3 (Hold) suggests potential for inline performance with the broader market, but it’s essential to consider all available information to make informed decisions.
