Wall Street analysts are not infallible, and their opinions and predictions should be taken with a grain of salt. However, many of them do solid work in their stock research, and there is nothing wrong with taking a look as part of your own analysis.
On that note, analysts have issued very bullish notes on Cadence Design Systems (CDNS -2.66%), a provider of design tools for electronics and integrated circuits, and consumer experience expert NICE (NICE 0.18%). So let's dive into the Street's optimistic reviews and see whether they make sense to us ordinary stock pickers.
1. Cadence Design Systems
The analyst community is overwhelmingly positive on Cadence Design Systems, and only becoming more bullish over time. Three months ago, 10 analysts rated the stock a buy, while seven called it a hold. Now, the group of indifferent ratings is down to four, and the bullish grades expanded to 12, all according to FactSet data.
This Tuesday morning, Cadence saw its latest rave review, as Atlantic Equities analyst Peter Sazel lifted his rating on the stock from neutral to overweight. Sazel likes the company's strong business moat, effectively a duopoly with archrival Synopsys.
Softening demand in the consumer-level end markets for electronics, smartphones, and new cars is balanced by long-term growth trends in the same markets. In other words, Sazel suggests looking past short-term challenges to focus on completely intact long-term growth targets.
About a month ago, Bank of America analyst Vivek Arya boosted Cadence from neutral to buy, arguing that his earlier concerns over lost business opportunities in the Chinese market turned out to be "overly conservative."
The U.S. government has blocked the export of semiconductor manufacturing equipment to China, but the sanctions didn't apply to systems for electronic design automation (EDA), so Synopsys and Cadence didn't lose that crucial market after all. Furthermore, the analyst noted that American EDA solutions are shipping to China with restricted feature sets nowadays, lowering the risk of more restrictive limits to the order flows.
While locking down the important Chinese sales channel, Cadence is also broadening its horizons into new target markets. Last year's buyout of OpenEye Scientific makes it a player in molecular modeling and simulation software. Cadence is also building more artificial intelligence (AI) into its systems design software, tapping into the machine-assisted design trend that could drive future sales higher.
So I see where the analysts get their Cadence Design Systems enthusiasm from. This company is going places as the chip industry and global supply chains come back from a multiyear slump. The stock isn't a bargain at 60 times trailing sales and 42 times free cash flow, but I think it belongs on your list for further consideration.
2. NICE
NICE isn't cheap either, with shares changing hands at 53 times earnings and 32 times free cash flow. However, I have no complaints about the company's financial performance. The top-line sales growth has accelerated in recent years, and earnings are soaring, too:
NICE Revenue (TTM) data by YCharts
This Israel-based company makes software systems to automate and manage call centers, help lines, self-service stations, and other consumer-facing experiences. NICE builds a lot of AI-powered smarts into its products, and its client list includes some of the largest consumer-oriented businesses on the planet. Chances are, you have interacted with NICE systems in recent years.
Here, the Greek chorus of Wall Street sounds more like a Gregorian chant, nearly all in unison. Indeed, 12 out of 13 analyst firms rate the stock a buy or overweight, and the average price target sits 28% above NICE's current stock price.
James Fish from analyst firm Piper Sandler joined the bullish chorus on Tuesday, lifting NICE's stock from neutral to overweight. According to Fish, NICE is winning contracts for cloud-based customer interaction services as its more traditional competitors "struggle" in this economy. In his analysis, the second half of this year should be a tipping point, where recurring revenues become the company's largest revenue stream.
NICE is carving out a promising position in a potentially explosive target market. It's hard to bet against AI-driven automation these days. That being said, this company's demonstrated growth isn't quite as impressive as Cadence's. So I wouldn't mind owning both of these stocks someday, but neither one looks ripe for the picking quite yet, and I would probably grab shares of Cadence Design Systems first.
