DA Davidson: Cadence Design's Share Price Out Of Sync With Strong Business Activity

Cadence Design Systems Inc CDNS shares have pulled back 20 percent since late January, prompting a D.A. Davidson analyst to observe that the company's business strength is not reflected in its weak stock performance.

The Analyst

Aanalyst Thomas Diffely upgraded shares of Cadence Design from Neutral to Buy and reiterated a 12-18 month price target of $45.

The Thesis

Design activity for Cadence Design as well as the broader engineering design automation, or EDA, industry remains at elevated levels, Diffely said in a Thursday note, citing D.A. Davidson's checks. 

The company's long-term drivers continue to strengthen, as it benefits from a broadening customer base, a continued ramp in complexity and the new wave of computing, the analyst said. 

The impact of the new ASC 606 revenue recognition rules is estimated by D.A. Davidson to be a $40-million hit to 2018 revenue and a $25-million negative in 2019. The previous uncertainty over the ASC 606 is well-understood and is fully reflected in consensus estimates, Diffely said. 

"Based on continued strong design activity, emerging growth drivers and management's history of conservative annual guidance, we believe current consensus estimates could prove to be conservative." 

With the recent weakness, the shares now no longer trade at a meaningful premium to Synopsys, Inc. SNPS, while the company continues to gain share, largely from Mentor Graphics, Diffely said. 

D.A. Davidson remains bullish on both near- and long-term EDA prospects.

The Price Action

Cadence Design stock has gained about 22 percent over the past year, although it has shed about 10 percent in the year-to-date period.

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Photo courtesy of Cadence Design.