IBD 50 stock Cadence Design Systems surged past an alternate entry of 177.37 but is still grinding through a long consolidation. This growth stock has maneuvered multiple bottlenecks since the pandemic, from chip shortages to bug downtime. Its electronic design software and AI-powered tools are speeding the transition to system-on-a-chip (SoC) architecture.
The electronics systems designer makes software, hardware and IP designs for 5G, automotive, aerospace, health care and other industries. CDNS stock stands to benefit from growth in the SoC market, which is projected to reach $215 billion by 2027.
The company has a strong track record of double-digit sales and earnings growth over the past three quarters. Year-over-year sales grew 20% to $902.6 million last quarter, while $1.06 earnings per share marked 33% growth. Fourth quarter earnings are due on Feb. 13.
The Nasdaq-100 component has a Composite Rating of 96 and a Relative Strength Rating of 88. The strongest stocks have technical readings above 80.
This electronic design superstar has joined the elite IBD 50 list of growth stocks. The RS line is at a 52-week high while shares rebounded above the 50-day line in strong volume earlier this month.
Growth Stock Benefits from Chip Industry Transition
Tech giants Apple, Tesla and Google-parent Alphabet manufacture chips in-house, in part to tackle pandemic-induced shortages, according to reports.
Ford Motor, General Motors and other automakers faced similar shortages, as unfinished vehicles awaited chips or were delivered to customers without some features. These chips control multiple functions in automobiles, from heated seats to navigation.
This growth stock is part of a key shift in semiconductor technology that is increasing production scale through customized chips.
According to a 2022 report, Apple and Tesla are customers. Taiwan Semiconductor Manufacturing and other chip companies also buy Cadence software to design their chips.
In September, the San Jose chip design software maker, with offices in the U.K., Ireland, China, Japan and India, launched an AI platform called Verisium. The intelligent service is built on the Joint Enterprise Data and AI (JedAI) system, which is used to improve chip performance.
AI capabilities allow faster verification of multiple algorithms that run on systems on a chip. Earlier, manual verification could check just one algorithm at a time, bottlenecking the system.
Cadence Acquisitions
Cadence made two key acquisitions in 2022, buying OpenEye Scientific for $500 million and Future Facilities for an undisclosed amount.
Through OpenEye, Cadence will combine its computational software with molecular simulation in the biotechnology and drug discovery industry. At the same time, Future Facilities will optimize data centers, running virtual models that spot redundant energy consumption that consumes huge amounts of power units.
This growth stock has strong institutional interest, as seen by its Accumulation/Distribution Rating of B+ on an A+ to E scale. Mutual funds own 58% of outstanding shares, a bullish indicator.
Among exchange traded funds, The Invesco DWA Technology Momentum ETF and the Franklin Intelligent Machines ETF hold shares of Cadence.
Please follow VRamakrishnan on Twitter for more news on growth stocks @IBD_VRamakrishnan
