Cadence Design Systems (NASDAQ:CDNS) creates software and hardware that assists semiconductor companies in designing chips. The company along with competitors Synopsys (SNPS) and Mentor Graphics (MENT) comprise the only major players in the Electronic Design Automation industry. Swallowing up the smaller companies has been key to survival of the Big 3 as the EDA industry is subject to change as quickly as technological advances are made. CDNS has made over 50 acquisitions in about 20 years and is the second largest of the Big 3.
The EDA industry is dependent on new design demands for their revenue. According to CDNS CEO Tan, the market opportunities exist for his company and the EDA industry in the cloud, the Internet of Things, communications, computers and the automotive sector.
A report by Yole Development pegs the market size of the Internet of Things in the $70 billion range by 2018 and over $400 billion by 2024. The global cloud computing market is expected to reach $270 billion BY 2020,
Cost saving and the increased usage of mobile devices are driving new product creation and business opportunity for CDNS. The Internet of Things is about making dumb objects smart and interconnected. At the Consumer Electronics Show in Las Vegas last month, some of the products on display included connected coffee pots,GPS-enabled pet trackers, connected workout clothing and plant containers that automatically water the plants. Cloud computing needs solutions for mobile communications issues.
CDNS' strategy has been to extend beyond offering just semiconductor solutions but to provide complete end products, as they demonstrated at CES 2015.
Another key element in CDNS's strategy has been its collaboration with ARM to develop products jointly and sometimes even including a third party such as the project with Taiwan Semiconductor (TSMC) to develop wearable devices.
About 90% of CDNS's revenue is recurring, making it relatively predictable. Their Q4 earnings report this week came in line with estimates on revenue and EPS as is typical for the company.
CDNS is projected to grow at over a 20% growth rate over the next year. The company does not project out beyond one year It trades at a modest forward PE of just 13.
Institutional interest in CDNS if fully subscribed at over 100% and there are several noteworthy names, but one in particular stands out according to Insider Monkey who points out Glenview Capital's stake and the recent successful plays that the fund has enjoyed.
There are several analysts covering CDNS and likely that new reports will be coming out shortly. Northland Capital has been very bullish on the stock maintaining an Outperform rating and a price target of $23, citing its "strong market share momentum." .
RBC Capital and DA Davidson have a "buy" rating and a $20.00 price target on the stock.
CDNS is a play on riding the wave of The Internet of Things and growth of Cloud Computing. With these two themes in play, there is likely to be a continuation of growth above 20% with enough opportunity to satisfy each of the Big Three in the EDA industry. If either of these themes fail to play out, CDNS will not succeed.
Sergio Heiber
I write about and invest in mostly early commercial stage companies that have a large TAM and zero to little direct competition. I will provide updates on companies that I introduce as long as the goalposts set by management are met. Of course, there are always unforeseen developments more often in the microcap world than otherwise and there are macro conditions that are beyond the control of company management. I'm also not always right but I like the risk/reward characteristics of investing in micro-caps.My articles are reflective of my investment interests and hopefully provide readers with ideas that they can further explore. I tend to be on the long side and generally abstain from writing negative or short themes. Besides my articles on SA, readers can find my work at MicroCapClub.com and StockPick.app
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