For Immediate Release
Chicago, IL – July 21, 2023 – Zacks Equity Research shares Cadence Design Systems CDNS as the Bull of the Day and Ligand Pharmaceuticals LGND as the Bear of the Day. In addition, Zacks Equity Research provides analysis on The Boeing Company BA, L3Harris Technologies LHX and Embraer SA ERJ.
Here is a synopsis of all five stocks.
Bull of the Day:
I last profiled Cadence Design Systems in late March, right before the AI-propelled moonshot of NVIDIA shares from $250 to $475.
The reason this is important is that NVIDIA , the “King of AI” with GPU computing, is a big Cadence customer and partner in the design and simulation of semiconductor architectures.
If you are reading this before Monday afternoon July 24, you still have time to buy Cadence near $240 before it goes higher on what I expect will be another beat-and-raise quarterly report.
What Hath ChatGPT Wrought?
In a special report on ChatGPT for Zacks Confidential members in March, I reiterated why NVIDIA was so important to computing — even before the “chatterbot that ate the internet” became all the rage.
And I also recommended investors buy the only meaningful competitor for Cadence — another electronic design automation (EDA) wizard called Synopsys — since I already owned both NVDA and CDNS in my TAZR Trader portfolio.
Investors could have bought NVDA under $260, SNPS under $375, and CDNS near $200 in late March. You can find that report at this link or by emailing Ultimate@Zacks.com. Tell ’em Cooker sent you.
ChatGPT: Time to Become An AI Conversationalist
Here was the summary of my reco…
Buy Synopsys: This is half of a “duopoly” in semiconductor software EDA (electronic design automation) and SDE (system design enablement). My NVDA investors already know that I am heavily invested in Cadence, which is the “other half” and a Zacks #1 Rank, because it is a key R&D partner for NVIDIA simulation and design. Synopsys offers a full suite of products used in the logic synthesis and functional verification phases of chip design, including a broad array of reusable design building blocks. Shares are cheaper on a relative basis to Candence — on both EPS and price/sales metrics — and the stock is poised to break out above $400.
And here’s what I wrote in my March 29 Bull of the Day feature on CDNS…
Cadence 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.
Why Buy Cadence Now?
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.
Huang and his top engineering teams don’t want to send any designs to the chip foundry that haven’t been fully simulated under all parameters that are demanded from the world’s top GPU “cards” — that go by the thousands into DGX supercomputer systems and sell for $10,000 to $20,000 each depending on the generation and complexity.
It was only a few years ago that Jensen & Co. were building a supercomputer for Tesla with 5,700 GPUs that could execute 1.8 exaFLOPS (a quintillion floating point operations per second). Those Volta gen cards only had 21 billion transistors and were deployed to help Tesla with the “massively parallel architectures” needed to harness the data demands of Full Self-Driving (FSD) technology.
Tesla engineers have now learned enough about AI computing that Elon Musk is building their own in-house supercomputer and may not need NVIDIA GPUs anymore (but I doubt it).
Because now that NVIDIA leads the dive under 5-nanometer architectures, their new Ampere and Grace Hopper chip sets can contain anywhere from 50 to 80 billion transistors — in the space of a shoebox. This is to say nothing of the NVIDIA “CUDA” stack of hardware + software. CUDA stands for Compute Unified Device Architecture.
To learn more about how NVIDIA drives the AI revolution with their GPU-CUDA engines for machine learning and deep learning — that a 10-fold stack of global corporations suddenly realized they needed — see this recent video and article…
Nvidia DGX: Workhorse of AI Will Drive NVDA to $2 Trillion
Cadence Wins as an Arms Dealer in the Nanometer Wars
Through its Intelligent System Design strategy, the company offers software, hardware, services and reusable IC (integrated circuit) design blocks to electronic systems and semiconductor customers.
Cadence’s core EDA software and services enable engineers to develop different types of ICs. Its design IPs are directly integrated into the ICs.
Besides the fact that CDNS is like a planet orbiting the star of NVDA, more Wall Street analysts are finally waking up to the importance of what Cadence calls “Intelligent System Design.”
Stifel Nicolaus semi analysts upgraded CDNS from Hold to Buy this past week and launched their price target on shares from $210 to $300.
The Stifel team titled their report “AI is Likely to Drive a Virtuous Cycle for EDA.”
That’s an understatement. Here’s what I highlighted over two years ago when I first saw NVIDIA CEO Jensen Huang feature Cadence in a virtual keynote he gave…
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.”
(end of notes from April ’21)
As if being a major intelligent planet orbiting the stellar NVDA wasn’t enough, Cadence is embedded in other key partnerships with Taiwan Semiconductor, the giant chip foundry, and Microsoft, the giant engine of ChatGPT, to accelerate the physical verification of digital designs
The collaborations will help minimize design schedules and compute costs using the Cadence Pegasus Physical Verification System. Considering designers are always under pressure to meet design schedules and compute budgets, any procedural improvements are enabled to progress more efficiently — and profitability.
Announced in April, this new system should optimize CPU usage to decrease cloud computing costs by as much as 20%.
What to Listen for on Earnings Call
Cadence has many products, growth initiatives and strategies that are too in-depth to explain here. So let me just share some of these pivot points that analysts may focus on…
Cadence is expected to benefit from secular trends like 5G, rising hyperscale computer consumption at the enterprise level, and emerging AI/ML technologies, which are all fueling digital transformation across various end markets and accelerating demand for advanced semiconductor chips.
The company’s System Design and Analysis division is likely to have benefited from its growing presence in industries like 5G, aerospace & defense, wireless and communications.
Frequent product launches and strong uptake of the company’s existing solutions like Palladium Z2 and Protium X2 systems, Cerebrus, Clarity 3D Transient Solver, Sigrity-X, and Xcelium Logic are likely to have driven the second-quarter performance.
The launch of Virtuoso Studio and Allegro X AI is anticipated to have helped the company tap the growing demand for generative AI solutions in the digital, verification and systems arenas.
What About the Valuation?
Besides the Stifel team upgrade, there were other notable moves in the past few weeks before Monday’s quarterly earnings report…
KeyBanc: Cadence Design price target raised to $265 from $235
Wells Fargo: Cadence Design price target raised to $270 from $250
With current sales projections of $4.5 billion next year (10% growth), the stock price-to-sales valuation is very rich at 16.5 times. So, it’s possible that these analysts have been somewhat reluctant to jump on the NVDA starship and are simply motivated now by FOMO in case Cadence delivers another big beat-and-raise.
So, they don’t want to be caught flat-footed. But I think that with any key satellite of a new star like NVDA, it takes time for institutional investors to accept this kind of valuation.
And so most of Wall Street is still catching up to a software innovator they didn’t see coming. I say to investors that you can still hitch your wagon to the NVIDIA star.
Bear of the Day:
Ligand Pharmaceuticals is a $1 billion operator of bio-pharmaceutical acquisitions and development. The San Diego company focuses on developing or acquiring royalty revenue generating bio-pharma assets.
Ligand’s Captisol formulation technology has allowed it to enter into several licensing deals and generate royalties.
Captisol is a well-validated chemically modified cyclodextrin that is designed to improve safety and solubility, stability, and bioavailability or lessen the volatility, irritation, smell or taste of drugs.
The Captisol drug formulation platform technology was added to Ligand’s technology portfolio following its 2011 merger with CyDex.
In January 2016, Ligand acquired OMT, Inc., (Open Monoclonal Technology) for about $178 million. Other technology platforms at Ligand include an antigen discovery platform and a protein expression platform.
All these technologies including Captisol have created a strong platform for Ligand to seek new licenses and partnerships. Ligand has partnership agreements with leading healthcare companies like Novartis, Amgen, Merck, Pfizer, Celgene, Gilead and Lilly among others.
The company continues to buy smaller companies to increase and leverage its technology platforms.
In November 2022, the company completed the separation of its OmniAb business, into a separate public company named OmniAb (OABI). Following the completion of spin-off, Ligand’s shareholders own 85% of this new company.
In 2022, Ligand recognized total revenues of $196.2 million, down 18.76% year over year. The company derived around 53% of revenues from Captisol sales. Royalties contributed about 37% to total revenues while Contract revenues contributed almost 10% in 2022.
Why Ligand Is a Zacks #5 Rank
For the current year, Ligand revenues are expected to drop 36% to $140 million.
And while revenues are projected to rebound next year, EPS is projected to decline by over 10%.
This speaks to the volatility of a business model dependent on new biotech M&A and royalty licensing.
A trough in earnings may be coming for Ligand in their next quarterly report in mid-August. But until then, investors should be cautious. The Zacks Rank will let you know.
Additional content:
Will Abnormal 787 Costs Impact Boeing’s (BA) Q2 Earnings?
The Boeing Company is set to release second-quarter 2023 results on Jul 26, before the opening bell.
In the last reported quarter, the company incurred a loss of $1.27 per share, which came in much wider than the Zacks Consensus Estimate of a loss of 98 cents. Solid commercial delivery figures, along with robust aftermarket services trend, are likely to have boosted Boeing’s second-quarter earnings. Yet, abnormal costs associated with 787 might adversely impact its overall quarterly results.
Solid Commercial Deliveries to Aid Results
Boeing’s second-quarter deliveries reflect a solid 12.4% surge in commercial shipments from the year-ago quarter’s reported figure. However, defense shipments declined 5% year over year.
For manufacturing companies like Boeing, successful deliveries of finished products play a crucial role in boosting revenue growth. Therefore, such a significant improvement in the jet maker’s deliveries for its commercial segment is expected to benefit its overall second-quarter results.
The Boeing Company price-eps-surprise | The Boeing Company Quote
While the jet giant’s military business revenues accounted for almost 35% of its total revenues as of 2022-end, the commercial business contributed 39%. Therefore, improvement in Boeing’s commercial shipment is likely to have outweighed the decline in defense shipment, thereby aiding its overall top-line performance.
Expectations for BGS
We remain optimistic about Boeing Global Services (BGS) unit’s second-quarter performance.
Notably, steadily growing domestic and international air travel are expected to have bolstered fleet utilization, thereby boosting aftermarket commercial jet services in the second quarter of 2023. Meanwhile all 737 Max operators having returned to flying this jet as of Mar 31, 2023, must have also bolstered aftermarket services revenue for Boeing in the soon to be reported quarter.
This, along with several BA converted freighter and materials management agreements in the recent past, is likely to have added an impetus to BGS’ second-quarter revenues.
The Zacks Consensus Estimate for the unit’s revenues is pegged at $4,571 million, indicating an improvement of 6.4% from the year-ago quarter’s reported number.
The consensus mark for earnings is pinned at $753.7 million, indicating growth of 3.5% from the prior-year quarter’s level.
Cash Flow Projections
Higher jet deliveries, especially that of 737 aircraft in the past couple of quarters, along with the recent strong order activity and increased aftermarket services, are expected to have contributed to Boeing’s second-quarter cash flow reserve.
Q2 Expectations
Considering the aforementioned discussion, we remain optimistic about BA’s overall second-quarter revenue and earnings performance. However, expected abnormal costs in relation to the 787 program, along with periodic expenses, might have had an adverse impact on its bottom line.
The Zacks Consensus Estimate for Boeing’s total revenues is pegged at $18.46 billion, implying a 10.7% improvement from the prior-year period’s reported figure. The bottom-line estimate is pinned at a loss of 99 cents per share, indicating a significant deterioration from the year-ago quarter’s reported loss of 37 cents.
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Boeing this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. However, this is not the case for BA.
Boeing has an Earnings ESP of -1.45% and a Zacks Rank #3. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stocks to Consider
Below are a couple more defense stocks that have the right combination of elements to post an earnings beat this reporting cycle.
You can see the complete list of today’s Zacks #1 Rank stocks here.
L3Harris Technologies is scheduled to release second-quarter results on Jul 26. LHX has an Earnings ESP of +1.67% and a Zacks Rank #3.
L3Harris delivered a four-quarter average negative earnings surprise of 0.37%. The Zacks Consensus Estimate for LHX’s earnings is pegged at $2.91 per share, while that for sales is pinned at $4.34 billion.
Embraer SA is expected to report second-quarter results on Aug 14. ERJ has an Earnings ESP of +25% and a Zacks Rank #3.
Embraer delivered a four-quarter average negative earnings surprise of 253.33%. The consensus mark for ERJ’s earnings is pegged at 12 cents per share, while that for sales is pinned at $1.16 billion.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>
The Boeing Company (BA) : Free Stock Analysis Report
Embraer-Empresa Brasileira de Aeronautica (ERJ) : Free Stock Analysis Report
Ligand Pharmaceuticals Incorporated (LGND) : Free Stock Analysis Report
Cadence Design Systems, Inc. (CDNS) : Free Stock Analysis Report
L3Harris Technologies Inc (LHX) : Free Stock Analysis Report
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