It is a good time to take a fresh look at one of our all-time favorites, which is usually too expensive to recommend — Cadence Design Systems (CDNS), suggests Jon Markman, growth stock specialist and editor of Strategic Advantage.
Tech stocks have been mostly in a funk since January due to concerns over valuations and rising interest rates. Many shares have been cut in half as the tech-heavy Nasdaq fell by 30%. The carnage for newer tech companies bereft of earnings has been more extreme. An index of special purpose acquisitions companies, the pinnacle of the recent hype era is down 60%.
Cadence Design Systems sits comfortably at the other end of the spectrum. Although shares are down 16% year-to-date, this fast-growing company is certain to be among the first to rekindle investor favor. The weakness is 2022 is a buying opportunity, especially now that sentiment for semiconductors is improving.
The San Jose, Calif-based firm makes software used by the semiconductor industry to design microprocessors, and help with software integration. Cadence is an extremely profitable business from the ground up. Current gross margins are 90%. Operating margins are 28%. And free cash flow is up 77% since 2020.
The firm is capably led by Lip-Bu Tan, a graduate of the nuclear engineering program at MIT. Tan is also the founder of Walden International, a venture capital firm that makes early stage investments in chip design firms.
Relationship Science, a Silicon Valley analytics firm, has consistently named Tan among the most connected executive in technology. He earned a perfect score of 100 in 2017 for his influence in the technology sector, and access to corporate boards. He sat on 69 of them.
During 2019 Tan deepened Cadence’s relationship with Samsung, the second largest semiconductor company in the world, behind Intel (INTC). Cadence also earned a fourth partner of the year award from Taiwan Semiconductor (TSM), the world’s largest independent semiconductor fabricator.
Cadence touches every part of the sector, small and large. The company builds the software those businesses need to scale new processes and to integrate with ever-evolving software applications.
Bottom Line: Cadence shares have been a part of our "Digital Transformation" buy list since July 1, 2019, and they are up 122%. For newcomers, the shares have now built a seemingly sturdy base of support at $133 and appear good to go after busting through resistance at $161. In my view, Candance is a steal.