Why Cadence Design Systems Fell 13% in July

Shares of semiconductor design software maker Cadence Design Systems (NASDAQ: CDNS) fell 13% in July, according to data from S&P Global Market Intelligence .

Cadence sells software and tools that help companies design semiconductors. So in the age of AI and with big cloud companies now investing in their own chip designs, Cadence's revenue has accelerated in recent years.

Even though Cadence delivered solid second-quarter results during the month, investors turned nervous, perhaps looking for a bigger artificial intelligence (AI) payoff.

A beat, but not enough of one

In the second quarter, Cadence posted revenue growth of 9% to $1.06 billion, with adjusted ( non-GAAP ) earnings per share of $1.28, up just 1.2%. Despite the relatively muted numbers relative to the past few years, both figures came in ahead of expectations. The company also raised its revenue guidance for the year slightly to 13% growth, although it lowered its adjusted EPS range for the year, too, on higher investment.

Wall Street was perhaps looking for perfection, especially as the stock had risen about 20% on the year and was trading around 80 times earnings at the start of the month. Investors had very high expectations for anything related to AI growth this earnings season and have been rather unforgiving of all expensive tech stocks.

Cadence's projected 13% revenue growth would be solid in a vacuum, but would also mark a deceleration from the 19% growth in 2022 and the 15% growth last year. Over the past few years, Cadence has seen its three-year average growth CAGR accelerate from 8% as of 2018 to 16% this year. This has been due to the increased complication of chip design and more and more cloud giants and start-ups alike joining the semiconductor design industry. So, investors were perhaps disappointed that there was any deceleration at all.

Moreover, results from other cloud giants who reported during July were similarly solid but apparently not enough for investors hoping for a bigger payoff, and sooner, from AI spending. That led some to believe AI investment could potentially decelerate from today's torrid pace, causing a big sell-off in year-to-date AI winners .

Cadence could be a pickup on weakness

Despite the recent sell-off, Cadence should be a winner in the technology space over time as one of only two major semiconductor design software companies.

So is the sell-off really an opportunity for investors? If the AI investment doesn't yield the requisite revenue growth or cost savings for customers, there could be further downside. But if you believe the AI trend will be transformative for businesses, Cadence should definitely be on your buy-the-dip list today .

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cadence Design Systems. The Motley Fool has a disclosure policy .