Cadence easily outperformed broader markets
Cadence Design Systems (CDNS) is one of the few semiconductor stocks that has given staggering returns this year. The semiconductor industry has been volatile due to the escalation of trade wars and then the truce between China and the United States.
CDNS stock has gained over 70.0% in 2019. The stock is trading at $74.02 per share, which is 89.4% above its 52-week low of $39.08. CDNS stock also lost 10.0% in market value due to the Huawei ban but has since recovered. While CDNS stock has been impressive this year, the stock is up over 200.0% in the last three years and 331.5% in the last five years. It has created massive investor wealth over the years.
While most semiconductor stocks are in a downturn, Cadence has been able to grow sales in this period. Revenue for Micron (MU), Western Digital (WDC), and Applied Materials (AMAT) are estimated to fall by 24.1%, 19.6%, and 16.0%, respectively, in their current fiscal year. In comparison, analysts expect CDNS sales to rise 8.6% to $2.2 billion in 2019 and 6.7% to $2.48 billion in 2020.
The iShares PHLX Semiconductor ETF (SOXX) is up 29.0% year-to-date, while the VanEck Semiconductor ETF (SMH) has returned 28.0% this year. Micron, WDC, and AMAT have returned 24.8%, 32.2%, and 38.0%, respectively, since the start of 2019.
CDNS trading at a high PE multiple
The stock’s upward spiral this year has meant that CDNS is now trading at a high valuation. CDNS stock is trading at a forward PE multiple of 32.6x. In comparison, its earnings per share are estimated to expand by 11.8% in 2019 and 8.6% in 2020. Its earnings might rise at a compound annual growth rate of 12.0% in the next five years.
The forward PE multiple shows us that CDNS is overvalued by 50.0%, which can be seen in analysts’ estimates as well. The nine analysts covering CDNS have a 12-month average target price of $68.76, which indicates that the stock is trading at a premium of 7.1% from its current price.
The global environment remains uncertain and the trade war is nowhere close to being resolved. CDNS stock could fall significantly if it misses Wall Street estimates due to its already high valuation.