Cadence Design Systems is Tuesday's pick for IBD 50 Growth Stocks To Watch as the artificial intelligence play has held up in a rough market. The AI stock now sits in a cup-with-handle base.
The electronic design software company develops software, hardware and solutions for the computing, chip, 5G communications, automotive and aerospace industries.
Cadence uses AI in its JedAI platform for chip design and data analytics. On Sept. 12, it announced its new next-generation AI-driven platform to streamline system design processes.
Cadence announced on Monday that it completed its acquisition of Intrinsix from CEVA for an undisclosed amount. The addition expands its aerospace and defense engineering capabilities.
The AI stock ranks No. 3 out of 12 stocks in the computer software design group. The group slipped to a mediocre No. 97 out of the 197 IBD industry groups from 74 four weeks ago.
AI Stock Bides Time In A Base
Cadence resides in a cup-with-handle base with a 247.50 buy point. Volume has trended lightly throughout the base.
The stock lifted above its 50-day moving average last week and is testing the line in Tuesday's market sell-off. Shares are about 7% off their 52-week high of 248.16, hit at the beginning of the base.
The relative strength line hit a 52-week high as shown by the blue dot on the weekly MarketSmith chart. Shares have gained about 43% this year vs. the Nasdaq's 25% rise.
The AI stock modestly beat second-quarter earnings and sales expectations on July 24. Earnings grew 13%, up from 10% and lagging the 17% increase two quarters ago. Meanwhile, quarterly sales grew 14% from 13% and 16%.
The company boosted its 2023 revenue growth to 15%, and raised its operating margin and earnings outlook in the company's second-quarter report.
Cadence Betting On AI For Growth
Cadence is betting on its AI capabilities for continued growth.
"Our dedicated focus on AI over the past several years, combined with our computational software expertise and invaluable data that lies at the core of AI, uniquely positions us to deliver to the tremendous potential of this transformative technology," Chief Executive Anirudh Devgan said in the second-quarter earnings release.
In addition, Cadence has a solid 3 IBD Earnings Stability reading, indicating a stable earning history over the last three to five years. Analysts project 19% full-year earnings growth this year and 16% in 2024, according to MarketSmith.
Mutual funds own 57% of shares, with 3,099 owning the AI stock in September, up from 2,957 in June and 2,798 in March. IBD Mutual Fund Index components MFS Growth Fund A and Fidelity Contrafund both increased their positions during the September quarter.
On the other hand, the stock has a D+ Accumulation/Distribution Rating indicating that institutions have been selling shares in the last 13 weeks.
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