Cadence Design Systems, the second-ranked component in IBD's Computer Software-Design industry group, is forming a fresh handle buy point. A CDNS stock breakout could present an opportune time to start a position in this maker of electronic systems design software.
Today's pick for IBD 50 Stocks To Watch had a powerful rally run in July. The company provides an array of services for chip design to a variety of industries, including data science, machine learning, computing, automobile, 5G communications and IoT markets.
CDNS stock is also an IBD Long-Term Leader.
The firm reported earnings on July 25, beating expectations on both top and bottom lines. Earnings rose 26% to $1.08 per share on $857.5 million in sales, marking an 18% year-over-year increase.
"We delivered another quarter of strong financial results with double-digit growth across all product categories," proclaimed John Wall, senior vice president and chief financial officer in a recent news release. "I am pleased that we exceeded all key operating metrics for the quarter, allowing us to raise our full year outlook."
Cadence also raised financial targets for the full year, now expecting to earn an adjusted $4.09 per share on sales of $3.49 billion. That's quite a hike from Wall Street expectations for $3.92 per share on sales of $3.41 billion.
Room To Grow In Electronic Design Automation Business
CDNS stock has shown long-term fundamental strength, increasing annual EPS for six straight years. Driving their success amid a turbulent semiconductor environment: the company's Electronic Design Automation (EDA) business. This division provides tools to help customers design electronic products such as chips and other devices.
While chip demand continues to fluctuate, demand for new designs is projected to grow in coming years. Allied Market Research now predicts the EDA market will grow from $11.5 billion in 2020 to $20.8 billion by 2027. Cadence is among the top players in this niche, along with competitor Synopsys.
Many software and technology firms that previously bought chips from third parties have shifted to designing them in-house. Cadence's business is poised to benefit from this development, as more firms venture into chip design.
CDNS Stock Nears Buy Point
CDNS stock began to pull back last December to build a cup base, which is now 32-weeks in length and includes a weeklong handle. The handle is yielding a buy point of 187.61.
Shares ran up over 24% in July and have now extended more than 14% above support at the 50-day moving average.
The stock is trading just 2% below the proper entry, according to MarketSmith chart analysis.
Cadence's relative strength line has been moving sideways for the past week as the stock consolidates strong gains. After such a strong run-up, a pause can be considered healthy action. Ideally, the RS line will push higher and notch a new high, alongside the breakout.
CDNS stock maintains high IBD Ratings that include an "A" Accumulation Distribution Rating, indicating it's under accumulation by institutions, as well as a near-perfect Composite Rating of 98.
