Cadence Design Systems and First Republic Bank have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – March 30, 2023 – Zacks Equity Research shares Cadence Design Systems CDNS as the Bull of the Day and First Republic Bank FRC as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Microsoft MSFT, Palo Alto Networks PANW and CrowdStrike CRWD.
Here is a synopsis of all five stocks.
Bull of the Day:
Cadence Design Systems is one of my favorite "stealth" semiconductor stocks -- and even more so with the explosion of use cases for AI tools like ChatGPT, the Generative Pretraining Transformer model that has taken 2023 by storm.
Cadence is at least a fifth-gen CAD/CAM software platform that allows semiconductor manufacturers to design and simulate myriad possibilities in the intricate and microscopic architecture of sub-10 nanometer integrated circuitry.
Cadence calls their unique brand and strategy of platform capabilities for chip makers Intelligent System Design.
NVIDIA is a Cadence customer precisely because Jensen Huang and his teams of engineers are highly focused on simulating all facets of their chip design and testing.
Through its Intelligent System Design strategy, the company offers software, hardware, and reusable IC (integrated circuit) design blocks to electronic systems and semiconductor customers.
Cadence's core EDA (Electronic Design Automation) and SDE (System Design Enablement) software and services enable engineers to develop many different types of ICs, with its design IPs directly integrated into the ICs.
Here's what I wrote last year when I was recommending CDNS shares near $130...
Nexus of Software and Industrial Design
The software to design semiconductors has become ever more important for at least 3 reasons...
First, transistor architecture has slipped to sub-microscopic levels under 10 nanometers, smaller than the coronavirus.
Second, the proliferation of applications in autos, mobile, home, factory, and datacenter are accelerating demand and custom solutions for OEMs.
Third, the engineering, testing and simulation of these ultra-miniature designs are critical before they are shipped to a chip foundry, or "fab."
Earnings and Estimates Drive Higher
In mid-February, Cadence posted non-GAAP earnings of 96 cents per share in fourth-quarter 2022, which topped the Zacks Consensus Estimate by 5.5% and increased 17.1% year over year.
Revenues of $900 million surpassed the Zacks Consensus Estimate by 2.2% and increased 16.4% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher demand for its products. CDNS ended the quarter with a backlog of $5.8 billion.
Performance in Details
In the fourth quarter, Product & Maintenance revenues (94% of total revenues) of $846 million were up 17.5% year over year. Services revenues (6%) of $54 million increased 1.5% from the year-ago quarter’s figure.
Geographically, the Americas, China, Other Asia, Europe, Middle East and Africa and Japan contributed 46%, 13%, 18%, 17% and 6%, respectively, to total revenues in the quarter under review.
Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 22%, 28%, 25%, 12% and 13% to total revenues, respectively.
The company’s digital IC business delivered 17% year-over-year growth in revenues. Digital Full Flow saw robust traction with 50 new customer wins in 2022. The company is expanding its digital software business by developing front-end Genus and Joules tools and signoff products like Tempus and Quantus.
The company’s Cadence Cerebrus AI-driven solution witnessed accelerating momentum and was deployed by several customers.
Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deals wins. The company won 30 new clients and 160 repeat orders in 2022. Most deal wins came from clients in the hyperscale, HPC and auto EV segments.
Cadence's System Design & Analysis Business segment reported 27% year-over-year growth as it expanded its presence beyond EDA.
In the fourth quarter, Cadence announced the launch of its LPDDR5X memory interface IP that is optimized to operate at speeds of up to 8533 megabits per second. LPDDR5X is a solution designed to enable high-speed data transfer between a system-on-chip and LPDDR5X DRAM devices, providing a high-bandwidth, low-power memory solution for a wide range of applications.
Also, the company unveiled the silicon-proven Cadence IP for GDDR6 on TSMC’s N5 process technology. It exceeds the company’s existing 16Gbps designs and helps customers to meet their design requirements.
For the fourth quarter ended, the total non-GAAP costs and expenses increased 16.3% year over year to $579 million.
Non-GAAP gross margin contracted 160 basis points to 91.1%, but the non-GAAP operating margin remained the same on a year-over-year basis to 36% in the quarter under review.
Cadence 2023 Guidance
Revenues for 2023 are projected in the range of $4-$4.06 billion. The Zacks Consensus Estimate for 2023 revenues is currently pegged at $3.8 billion, which indicates year-over-year growth of 7.4%.
Non-GAAP earnings for 2023 are expected in the range of $4.9-$5.0 per share. The Zacks Consensus Estimate for 2023 earnings is pegged at $4.52 per share, which suggests year-over-year growth of 7.3%.
For 2023, the non-GAAP operating margin is forecast in the range of 40.5-42%, with operating cash flow projected to be $1.3 to $1.4 billion. Management expects to utilize 50% of the free cash flow to repurchase shares in 2023.
ChatGPT and Your AI Future
On Valentine's Day, we trimmed some NVDA for 80%+ gains in my TAZR Trader portfolio.
Here was some of my commentary...
Last week, Barron's cautioned ChatGPT's capabilities should not be overestimated as the chatbot often generates inaccurate responses. According to experts, the way pattern-recognition and internet-scraping technology works means it lacks real understanding of concepts, and cannot generate original, creative insights.
As you know, we've never been NVDA investors for anything to do with ChatGPT. That's because the true engines of hyperscale computing, massively parallel AI, and knowledge innovation that Jensen Huang & Co. bring to industry and science will be staggering for years to come.
One article yesterday noted "This year has been a good one for Nvidia and its investors, as the company's shares have risen 46% since the end of 2022. As the BofA analyst says, any pullback in the stock should be 'short lived' as investors ready themselves for the company's GTC conference in March."
Of course TAZR Traders could not agree more with Arya, or the investors who now chase the stock to our benefit.
And in other AI news, we still love the software design partner of NVDA, Cadence Design Systems after its beat-and-raise quarter where backlogs are at a multi-year high of $5.8B and margins should continue to grow year-over-year.
Here were a couple of the stand out calls after earnings...
Cadence Design price target raised to $235 from $200 at Needham: Analyst Charles Shi said the company guided for hardware revenue to be front-half loaded, implying a flat revenue profile for the overall business through 2023, but there could be "meaningful upside" to Cadence's 12%-14% outlook should the industry's cyclical recovery arrive in the second half of the year and drive growth in its hardware business from the first half.
Cadence Design price target raised to $225 from $215 at KeyBanc: Analyst Jason Celino observed that Cadence closed out 2022 in style, posting better top-line and bottom-line results on broad-based strength. More importantly, the company "issued meaningfully higher 2023 guidance and expects 12%-14% year-over-year growth, the strongest initial growth forecast in our coverage history." Celino believes the stronger guidance is mainly attributed to a more upbeat outlook on hardware.
(end of Valentine's Day commentary excerpt)
Newsflash: Yesterday, the powers that be at ChatGPT creator OpenAI said "let's slow down before things get out of hand."
To learn more, follow my posts on Twitter @KevinBCook.
And if you want a copy of my latest ChatGPT report, where I detail why Morgan Stanley analysts had to reluctantly upgrade NVDA shares, just email Ultimate@Zacks.com and tell 'em Cooker sent you.
Bear of the Day:
First Republic Bank plunged back to all-time lows this week even after the $30 billion back-stop from a consortium of mega banks led by Jamie Dimon and JPMorgan.
So what's going wrong here in the bail-out nation?
While the market may have "known something" last week when they ignored Jamie -- and cratered the stock back down from a rally above $30 to below $15 again -- something else happened this week that made investor eyes go wide.
That event was the purchase of Silicon Valley Bank (SVB) assets by First Citizens BancShares for wonderful pennies on the dollar.
And that implied that no buyer might step in for FRC at any less of a significant fire-sale price.
The shifting fault-lines of the current regional banking crisis will not be fixed this month, or even next quarter.
With hundreds of smaller banks in the cross-hairs, investors need to take their time and examine the balance sheets of each before they invest.
To give you a broader idea of where I stand in my macro and micro analysis, I'll share my 3/27 commentary with my TAZR Trader members at Zacks...
TAZR Traders
As markets carefully digest the regional banking crisis, many astute eyes are on the credit markets and lending liquidity under the surface -- and how they will evolve and impact the economy and markets for the next 6-12 months.
Given that the FDIC commitments and the $30 billion backstop from big banks did little to support First Republic Bank, more guarantees and liquidity won't necessarily solve the next problem: most banks will contract and tighten lending standards.
The wild gyrations in the inverted yield curve are telling us about that stress and uncertainty, which in itself creates a negative feedback loop of reduced visibility, confidence, business development and clarity about how to hedge/refinance exposures.
And let me be clear: I am not rattling the bear cage here to confirm my bias or scare anyone. I am simply wondering if the fault lines we have seen exposed in the past few weeks are just the tip of the iceberg.
I'm especially focused on data about commercial real estate (CRE) debt and values after...
(a) the big office building defaults earlier this year by Vornado Realty Trust for $450 million and Columbia Property Trust for $1.7 billion, and
(b) learning that the size of exposure for regional banks to CRE is so high. From a Wall Street Journal article last week...
"Smaller banks hold around $2.3 trillion in commercial real estate debt, almost 80% of commercial mortgages held by all banks."
I don't want to ignore these potential fault lines just because they are not the immediate "crisis" headlines. I want to explore them and talk about them so we are not left unprepared.
So let's look at other views and facts that might align with the forecast that a credit crunch could tip the economy and markets over.
This morning, I have 3 recent angles that align with increased probability for this view:
1) Morgan Stanley's Mike Wilson last week...
"...the path of stocks is now about growth and our belief that earnings forecasts are 15 to 20% too high has increased. From an equity market perspective, the events of the past week mean that credit availability is decreasing for a wide swath of the economy, which may be the catalyst that finally convinces market participants that valuations are way too high. We've been waiting patiently for this acknowledgment because with it comes the real buying opportunity, which remains several months away."
2) Minneapolis Fed president Neel Kashkari on Sunday...
"It definitely brings us closer right now" -- Minneapolis Fed President Neel Kashkari's response to a question, during a CBS "Face The Nation" interview, on whether the latest turmoil in the banking sector could bring the U.S. closer to a recession.
"What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch."
3) Commercial Real Estate Exposure of Regionals...
Scott Rechler of RXR Realty: "There is $1.5T in commercial real estate debt maturing in the next 3 years. The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, & in a market with less liquidity."
The RXR platform, based in NYC, manages 84 commercial real estate properties and investments with an aggregate gross asset value of $22.4 billion. Rechler thinks regulators need to intervene and provide smoother refinancing options for this debt over the next 12-18 months.
More from the WSJ article mentioned and linked above...
This year will be critical because about $270 billion in commercial mortgages held by banks are set to expire, according to Trepp—the highest figure on record. Most of these loans are held by banks with less than $250 billion in assets.
If those loans pay off, it would reassure markets. But a large number of defaults could force banks to mark down the value of these and other loans, analysts say, reinforcing fears over the financial health of the U.S. banking system.
Many of these borrowers will have a hard time paying off their loans, said Tomasz Piskorski, the Edward S. Gordon professor of real estate at Columbia Business School. “The destruction of value is quite big,” he said.
While a number of banks have seen drops in the value of their bondholdings—a key factor in Silicon Valley Bank’s collapse—figuring out by how much the value of their mortgages has dropped is trickier because they aren’t publicly traded and every building is different.
In a recent paper, a group of economists including Mr. Piskorski estimated that the value of loans and securities held by banks is around $2.2 trillion lower than the book value on their balance sheets.
That drop in value puts 186 banks at risk of failure if half their uninsured depositors decide to pull their money, the economists estimate. Real-estate loans account for more than a quarter of the shortfall, said Mr. Piskorski.
(end of WSJ excerpt)
As promised, I'm working to keep you informed about this unfolding crisis.
We continue to hold the Regional Bank ETF as a favorable risk/reward opportunity should stability prevail.
Cooker
(end of TAZR commentary excerpt from 3/27)
This is a very volatile situation and I don't pretend to know how it ends.
But to follow real-time insights, check out my Twitter feed @KevinBCook where I'm frequently commenting on all things real estate and finance.
Additional content:
Microsoft (MSFT) Introduces ChatGPT-Powered Security Co-Pilot
Microsoft announced the release of Security Copilot, a GPT-4 implementation that brings generative artificial intelligence (AI) capabilities to its in-house security suite, and features a host of new visualization and analysis functions.
The security product is aimed at helping cybersecurity professionals identify breaches, threat signals and analyze data, shaped by OpenAI’s ChatGPT-4. Security Copilot will combine the search and natural language reply capabilities of ChatGPT-4 with Microsoft’s threat intelligence capabilities.
Security Copilot enables defenders to move at the speed and scale of AI, and combines the advanced large language model with security-specific models from Microsoft.
The tool can process up to 65 trillion threat signals taken from security tools like Microsoft Sentinel and create a natural-text summary of potentially malicious activity, such as an account compromise.
Microsoft claims that the Security Copilot delivers enterprise-grade security and privacy-compliant experience, and runs on Azure’s hyperscale infrastructure.
Security Copilot, also integrated with end-to-end Microsoft Security products, will expand a growing ecosystem of third-party products.
Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote
Focus on Strengthening Cybersecurity Portfolio
The new tool joins Microsoft’s cybersecurity business, which also offers Microsoft Defender, Microsoft Entra, Microsoft Purview and Microsoft Sentinel. Security Copilot has become one of the newest AI-powered products of the software company, aiming to inject the technology across all its offerings.
Microsoft technology blocks more than 25 billion brute-forced password theft attempts every second and more than 8,000 security professionals at Microsoft analyze more security signals than almost any other company. Notably, on average Microsoft’s Security Operations Center analysts utilize more than 100 different data sources.
Acquisitions like RiskIQ and Miburo give Microsoft breath of signal and depth intelligence on threat actors that no one else has.
The global cybersecurity market is expected to reach $317.02 billion by 2027, witnessing a CAGR of 13.37%, according to Mordor Intelligence. The rising security threats constantly remind organizations across industries to upgrade the existing IT infrastructure.
Microsoft, which carries a Zacks Rank #3 (Hold), faces stiff competition in the addressable market from the likes of Palo Alto Networks, CrowdStrike and others. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ever since the release of ChatGPT-3 in November 2022, the defensive use cases for generative AI have been rapidly growing in the enterprise security market.
Open-source security provider Armo released a ChatGPT integration designed for building custom security controls for Kubernetes clusters in natural language.
Likewise, the cloud security vendor Orca Security released its ChatGPT extension, which can process security alerts generated by the solution and provide users with step-by-step remediation instructions to manage data breaches.
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