Consistent Earnings Beats Hidden in Plain Sight

Artificial intelligence (A.I.) has grown by such leaps and bounds over these past few years that it’s at the point where it can literally learn at the speed of light! Researchers from George Washington University published findings this week that using light instead of electricity can improve both speed and efficiency of machine learning. This discovery could “save a tremendous amount of energy, improve response time and reduce data center traffic,” according to one of the GWU researchers.

As revolutionary as this could be, I don’t like to deal in hypotheticals with my investments. I like companies that are putting up good numbers now – and, luckily, this industry is already full of them. One company set to profit from advances in artificial intelligence and machine learning is Cadence Design Systems (CDNS). If this is a company you haven’t heard much about, then I’d like to change that today, because its latest earnings report is a sign of big things ahead.

Founded back in 1988 in Silicon Valley, Cadence Design Systems primarily offers silicon design creation and electronic design automation (EDA) software and hardware. EDA, in which a computer aids in the design of the electronic system, is most commonly used to design things like circuit boards, processors or other complex forms of electronics. It also helps improve the time it takes to design these intricate electronic parts.

Cadence Design Systems also provides the Cadence Verification Suite, which verifies chip designs before the chip is set in silicon. The company notes that its verification tools can reduce system integration times by up to 50%. In addition, Cadence Design Systems offers digital integrated circuit (IC) design products, implementation tools, system interconnect design products, intellectual property (IP) products and verification IP and memory models.

The bottom line is, CDNS has a big footprint in the software industry from which it can profit off of many tech advancements in the coming months and years: 5G communications, A.I., self-driving cars, and aerospace & defense. As for its stock, CDNS currently sits on my Growth Investor Buy List, where we’ve been rewarded with a 61% gain since March 2019.

And machine learning is probably the most exciting advancement of our time. In this field, Cadence Designs hopes to “create a new silicon renaissance,” so to speak, by using machine learning to improve productivity and optimize processing speed and memory.

In fact, during the company’s second-quarter earnings call on Monday, CEO Lip-Bu Tan said that he’s  “most excited about [sic] this transformation or the AI machine learning, this is all about data, how do you organize data, how do you analyze the data.”

There’s a lot to be excited about with the earnings numbers, too, even before machine learning reaches a fraction of its true potential.

In the second-quarter earnings report, Cadence Design Systems crushed analysts’ estimates for the second quarter and guided higher for fiscal year 2020. The company reported that second-quarter revenue increased 10% year-over-year to $638 million, up from $580 million in the same quarter a year ago. Second-quarter earnings rose 14.9% year-over-year to $185 million, or $0.66 per share, compared to $161 million, or $0.57 per share in the second quarter of 2019.

The consensus estimate called for earnings of $0.52 per share and revenue of $592.79 million. So, Cadence Design Systems posted a 26.9% earnings surprise and a 7.6% revenue surprise.

Company management noted that “Cadence has adapted well to the difficult environment,” and the company is well-positioned for the second half of the year. As a result, Cadence Design Systems upped its full-year guidance. The company now expects to achieve full-year revenue between $2.585 billion and $2.615 billion, up from $2.34 in 2019. Full-year earnings per share are forecast to be between $2.50 and $2.56, which compares to $2.20 per share in 2019.

A Narrowing Stock Market Environment

This is all the more impressive when you consider that other companies have withdrawn forward guidance entirely. But, in the end, the earnings numbers matter. And the companies that post strong results with positive third-quarter guidance will be the ones that thrive, long-term. So, it’s no surprise that CDNS climbed over 2% while the broader market sold off. 

Over the next few weeks, more negative earnings results will come to light.  As such, the market will grow more narrow, as institutional investors chase fewer stocks. Essentially, the stock market acts as a funnel and diverts funds to stocks like CDNS, which will continue to prosper even in a slowing earnings environment.

Of course, there are plenty of other growth stocks on my Growth Investor Buy List, several of which incorporate A.I., too. Another A.I. stock I am excited about actually provides the technology for other major tech companies, like Microsoft (MSFT) and Google (GOOGL).

I call it the A.I. Master Key.

Not only does the company make the “brain” that all A.I. software needs to function, but it dominates its corner of the market in doing so.

I’ll tell you everything you need to know, as well as my buy recommendation, in my special report for Growth InvestorThe A.I. Master Key. The stock is currently sitting pretty with an over 140% return on my Growth Investor Buy List, but it still under my buy limit price —  so you’ll want to sign up now ; that way, you can get in while you can still do so cheaply. (And earn a dividend to boot!)

Click here for a free briefing on this A.I. innovation.

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