Through acquisitions and in-house development, Cadence Design Systems, Inc. (CDNS) has assembled a comprehensive, end-to-end EDA solution that addresses most tasks in the design process.
However, the company appears to be losing share to Synopsys (SNPS) and is struggling through a downturn in the semiconductor cycle. Cadence posted year-over-year declines in the first half of 2008 and had hoped to make up for falling revenue in the second half. However, instead of a better second half, CDNS dramatically lowered guidance and is expecting accelerating declines.
Although we were skeptical of its predicted second half rebound, leading to our Sell recommendation, recent guidance was well below our low expectations. CDNS blamed the shortfall on difficult semiconductor environment and softness in consumer demand. Although the stock has fallen significantly this year, we believe it will fall farther given CDNS poor outlook. We therefore believe that the stock should trade at a discount to its peer group.
More challenging economic conditions are likely to affect the semiconductor industry and flow through to the EDA market as well, although at this point, Cadence appears to be the hardest hit. CDNS closest competitor is Synopsys, which is currently trading at a P/S [price-to-sales] multiple of 2.3x our 2008 revenue estimate, but with a much higher growth rate and estimates a good revenue visibility through 2008. We set a six-month target price of $5.00. Our target price of $5.00 represents a P/S multiple of 1.2x our 2008 sales estimate of $4.33.
Priyanka Poddar contributed to the report.
Read the full analyst report on CDNS
Read the full analyst report on SNPS
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