Why Cadence Design Systems Stock Crushed It on Thursday

Chip-making equipment specialist Cadence Design Systems (NASDAQ: CDNS) was targeted for a recommendation upgrade on Thursday, and investors eagerly leapt into the stock. It closed the day 6% and change higher, more than triple the percentage gain of the bellwether S&P 500 index.

Chasing a bargain buy

The company behind the upgrade was American banking powerhouse JPMorgan Chase. That morning JPMorgan pulled the lever on the upgrade; it now rates Cadence an overweight (i.e., buy), one peg up from its previous neutral. The bank also cranked the price target higher to $325 per share from the preceding $300.

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Much of the change has to do with Cadence's recent share price weakness, according to reports. The bank's analysts pointed out that at the reduced level the company trades at a forward price-to-earnings (P/E) ratio of 34. As such, it's teasing the low end of its five-year range.

For JPMorgan, that means it's a bargain. The researcher also highlighted what it considers to be management's sturdy business model and its considerable backlog that tallied a record-high $6.8 billion at the end of 2024. The company should also benefit from the heavy demand for hardware that can support artificial intelligence (AI) functionalities.

Hopes the trade war will end

Cadence's stock has been battered, somewhat unfairly, by the uncertainty and turmoil around the current trade dispute between this country and its major trading partners. That's certain to continue weighing on the company. However, as an important cog in the larger chip-making machine, it's going to be an important player once the smoke clears. I'd agree with JPMorgan Chase that it's a bargain now.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cadence Design Systems and JPMorgan Chase. The Motley Fool has a disclosure policy.