November 28, 2022

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Cadence Design Systems and The Trade Desk have been highlighted as Zacks Bull and Bear of the Day

For Immediate Release

Chicago, IL – August 11, 2022 – Zacks Equity Research shares Cadence Design Systems (CDNS)  as the Bull of the Day and The Trade Desk TTD as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Nordson Corp. NDSN, Titan International, Inc. TWI and Greif, Inc. GEF.

Here is a synopsis of all five stocks:

Bull of the Day:

I last wrote about Cadence Design Systems in June when you were getting another fantastic opportunity to buy shares near $140.

After another stellar quarterly report, it’s time for an update on this $50 billion provider of Electronic Design Automation (EDA) and System Design Enablement (SDE) software tools for semiconductor manufacturers.

Cadence calls their unique brand and strategy of platform capabilities for chip makers Intelligent System Design.

In fact, NVIDIA is a Cadence customer precisely because Jensen Huang and his teams of engineers are highly focused on simulating all facets of their chip design and testing.

Through its Intelligent System Design strategy, the company offers software, hardware, services and reusable IC (integrated circuit) design blocks to electronic systems and semiconductor customers.

Cadence’s core EDA software and services enable engineers to develop different types of ICs. Its design IPs are directly integrated into the ICs.

Here’s what I wrote in May when I was recommending CDNS shares near $130 and they rallied to $164 before the June tech rout…

Nexus of Software and Industrial Design

The software to design semiconductors has become ever more important for at least 3 reasons…

First, transistor architecture has slipped to sub-microscopic levels under 10 nanometers, smaller than the coronavirus.

Second, the proliferation of applications in autos, mobile, home, factory, and datacenter are accelerating demand and custom solutions for OEMs.

Third, the engineering, testing and simulation of these ultra-miniature designs are critical before they are shipped to a chip foundry, or “fab.”

(end of notes from May)

Beat & Raise Quarter

On July 25, Cadence delivered Q2 non-GAAP earnings of $1.08 per share, up from $0.86 a year earlier, topping the Zacks Consensus Estimate by 11.3% and increasing 26% year over year.

Revenue for the June quarter totaled $857.5 million, up from $728.3 million a year earlier. Revenues surpassed the Zacks Consensus Estimate by 2.45% and increased 18% on a year-over-year basis.

The top line benefited from continued strength across all segments driven by higher demand for its products. CDNS ended the quarter with a backlog of $5.6 billion.

Driven by strong second-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.47-$3.51 billion compared with the earlier guidance of $3.395-$3.435 billion. The Zacks Consensus Estimate for 2022 revenues is currently pegged at $3.4 billion, which indicates year-over-year growth of 13.8%.

The company anticipates Q3 earnings per share of $0.94 to $0.98 on revenue of $860 million to $880 million. Consensus estimates are for normalized EPS of $0.90 and revenue of $832.3 million.

For the full year, EPS is expected to be in the range of $4.06 to $4.12 against prior consensus estimates of $3.92 per share.

Acquisition of OpenEye Scientific Software

Cadence also announced it has struck a deal to buy privately held computational molecular design company OpenEye Scientific Software for about $500 million in cash.

OpenEye’s services are used by pharmaceutical and biotechnology companies for drug discovery. The transaction is expected to contribute “immaterial revenue” in 2022 and about $40 million in fiscal 2023, Cadence said.

This deal was especially exciting to me for two reasons:

1) As the portfolio manager for Zacks Healthcare Innovators, I am very interested in companies creating technology platform expertise in the exciting new eras of genomics and protein folding.

2) This move reinforces the company mission as being foundationally about software for any sector, not just the semiconductor verticals it already serves. It’s only natural that this platform expertise in simulation would move into Biosimulation where billions of combinations of proteins must be navigated.

The acquisition is aimed at accelerating Cadence’s Intelligent System Design strategy and expand its total addressable market. The company wants to expand its reach in the molecular modeling and simulation market as pharmaceutical and biotechnology companies leverage computational software solutions for drug discovery.

Performance Details

In the second quarter, Product & Maintenance revenues (93.6% of total revenues) of $802.3 million were up 16.6% year over year. Services revenues (6.4%) of $55.2 million increased 36.7% from the year-ago quarter’s figure.

Geographically, the Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 45%, 13%, 18%, 18% and 6%, respectively, to total revenues in the quarter under review.

Product wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 23%, 27%, 24%, 14% and 12% to total revenues, respectively.

The company’s digital and signoff business delivered 14% year-over-year growth in revenues. Digital Full Flow saw robust traction with 25 new customer wins in the first half of the year. The company’s Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers like Intel, NVIDIA, Broadcom, Samsung and Renesas.

Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deal wins. The company noted that it won 10 new clients and 50 repeat orders in the second quarter, which included more than two-third for both platforms. Mostly deal wins came from clients in the hyperscale, AI/ML and server customers.

In the quarter under review, the company launched 15 Verification IP solutions that enable customers across industrial, automotive, hyperscale data center and mobile domains to develop system-on-chip.

Cadence’s System Design & Analysis Business segment reported 29% year-over-year growth.

In the quarter under review, total non-GAAP costs and expenses increased 12% year over year to $493.9 million.

Non-GAAP gross margin contracted 120 basis points (bps) to 90.6%, but the non-GAAP operating margin was up 300 bps on a year-over-year basis to 42.4% in the quarter under review.

Balance Sheet & Cash Flow

As of Jul 2, 2022, the company had cash and cash equivalents of approximately $1.03 billion compared with $1.135 billion as of Apr 2, 2022.

The company’s long-term debt came in at $348 million as of Jul 2, 2022, compared with $347.8 million as of Apr 2, 2022.

The company generated an operating cash flow of $661.1 million in the reported quarter compared with the prior quarter’s figure of $588.8 million. Free cash flow in the quarter under review was $301 million compared with $319 million reported in the previous quarter.

The company repurchased shares worth approximately $320 million in the second quarter.

2022 Operating Metrics Boosted

In addition to the revenue and EPS guidance mentioned earlier, Cadence provided these forward-looking details about its performance…

For 2022, the non-GAAP operating margin is forecast in the range of 39.25-40.25% against the range of 38.5-40% guided previously.

For 2022, operating cash flow is projected to be $1.2 billion. Management expects to utilize the free cash flow generated to repurchase shares worth approximately $900 million.

Non-GAAP operating margin is forecast between 37% and 38% for the third quarter. The company expects to repurchase shares for at least $150 million in the next quarter.

Analyst Reaction

KeyBanc analyst Jason Celino reiterated his Overweight rating and $215 PT citing these drivers of growth and profitability…

**Increasing silicon content in autos, autonomous driving, IoT, AI/ML designs, and increasing chip design complexity provide multiyear growth tailwinds.
**EDA tailwinds + internal process improvements driving further efficiency + continued execution = pathway to high-30% OM over the next two to three years.
**Expansion to system analysis provides incremental growth opportunities

Needham analyst Charles Shi raised the firm’s price target on Cadence Design to $200 from $193 and keeps a Buy rating on the shares. The analyst cites the company’s “beat and raise” Q2 while noting that the stock may have recently come off the bottom. Shi adds that he is “encouraged” by Cadence Design’s print and also believes that the best time for bottom fishing of semiconductor stocks may arrive sooner than many investors think.

I agree with Shi. And investors may get one more shot and buying chips cheaper after the NVDA warning.

Disclosure: I own CDNS shares and may be entering NVDA shares again soon.

Bear of the Day:

The Trade Desk surged 36% on Wednesday after delivering an upbeat quarterly report and outlook.

While analysts had been lowering EPS estimates ahead of the report — causing TTD to fall into the cellar of the Zacks Rank — the good news sparked a big short-covering rally.

The upstart digital advertising platform that has been challenging the “walled gardens” of Meta Platforms and Alphabet announced increased traction with Disney and Amazon as it becomes the leader in Connected-TV (CTV) advertising.

The Trade Desk continues to gather support for its Unified ID 2.0 (UID2) technology — which is seen as the alternative to Google cookies and Facebook tracking — driven by these integrations.

TTD announced integration with Disney to power interoperability between Disney’s industry-leading Audience Graph and the open-source addressability framework of UID2.

And Amazon’s cloud division Amazon Web Services (AWS) announced that it will support UID2 on its platform.

Quarter Highlights

Revenues of $377 million also surpassed the Zacks Consensus Estimate by 3.21%. The top line soared 34.6% year over year.

Customer retention remained more than 95% in the reported quarter. At the end of first-quarter 2022, The Trade Desk had more than 1,000 customers.

The Trade Desk witnessed strong momentum in key initiatives like Connected TV, Shopper Data, Unified ID 2.0, OpenPath and new data marketplace.

Analyst Reaction

Oppenheimer analyst Jason Helfstein raised his price target on TTD to $78 from $60 and kept an Outperform rating on the shares.

The analyst noted that the company continues to deliver “best-in-class advertising results,” benefiting from the shift to CTV, retail media and privacy-focused advertising. Helfstein wrote that management sees Netflix, HBO, and Disney ad-supported streaming tiers and Disney/Amazon adoption of UID 2.0 as long-term tailwinds.

Valuation remains the main investor concern, as most acknowledge that Trade Desk is the dominant independent DSP (demand-side platform), with changes by Apple and Google driving more share to The Trade Desk platform.

Part of Wednesday’s rally in TTD may have also been because Bloomberg reported on Tuesday afternoon that the US DOJ is preparing to sue Google over ad market practices as soon as September. This could force Google to accelerate its retirement of cookie tracking technologies.

Bottom line on TTD: It’s a great company with a solid and growing business that allows advertisers incredible flexibility for targeting, automation and access to consumer behavior data on CTV. It’s probably a buy on pullbacks into the $60s but we need to see the estimates stop going down and start heading back up. The Zacks Rank will let you know.

Additional content:

Nordson (NDSN) Inks Deal to Acquire CyberOptics for $380M

Nordson Corp. has signed a definitive agreement to acquire CyberOptics Corp., a developer and manufacturer of high-precision 3D optical sensing technology solutions. CyberOptics generates annual revenues of approximately $100 million.

The all-cash transaction is valued at around $380 million (or $54 per share). The deal value represents a 31% premium over CyberOptics’ closing price on Friday. Subject to regulatory approvals, the transaction is expected to close in the first quarter of fiscal 2023.

The buyout will expand Nordson’s semiconductor test and inspection capabilities with the help of CyberOptics’ 3D optical sensing technology and wireless measurement sensors. It will allow NDSN to offer new differentiated solutions to its semiconductor and electronics customers.

CyberOptics’ innovative and proprietary 3D Multi-Reflection Suppression optical sensor technology and WaferSense® wireless measurement sensors will enable Nordson to expand into new areas of the semiconductor wafer fabrication and packaging process.

Nordson’s measures to expand operations through acquisitions are fostering its growth. Last November, the company acquired NDC Technologies, which has expanded its test and inspection platform. The buyout has strengthened NDSN’s position in the electronics end market and has helped the company expand into new end markets, including film extrusion & converting, consumer non-durable, cable & tubing and energy storage.

Zacks Rank & Key Picks

Nordson carries a Zacks Rank #3 (Hold). Some better-ranked stocks within the broader Industrial Products sector are as follows:

Titan International, Inc. presently flaunts a Zacks Rank #1 (Strong Buy). Its earnings surprise in the last four quarters was 47%, on average. You can see the complete list of today’s Zacks #1 Rank stocks.

Titan International has an estimated earnings growth rate of 157.7% for the current year. Shares of the company have rallied 37.5% in the past six months.

Greif, Inc. presently carries a Zacks Rank #2 (Buy). GEF delivered a trailing four-quarter earnings surprise of 22.9%, on average.

Greif has an estimated earnings growth rate of 36.8% for the current year. Shares of the company have gained 25.2% in the past six months.

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