Cadence Design Systems Inc. (NASDAQ: CDNS) gapped 7.21% on February 14, more than double the average turnover, following better-than-expected fourth-quarter results and increased guidance.

With the February 14 price action, the stock cleared a six-month base with a buy point of $395. It hit resistance at that area previously, so the stock is now facing a test: Can it drum up enough momentum to stage a rally, given the stellar results and guidance? 

Cadence specializes in the design of integrated circuits and electronic systems. Its products include systems on chips and printed circuit boards for use in various applications, including hyperscale computing, 5G communications, automotive, mobile, aerospace, consumer, industrial, and healthcare.

The San Jose, California-based company reported earnings of $0.96 a share on revenue of $899.9 million, year-over-year increases of 17% and 16%. Analysts' forecasts called for earnings of $0.92 per share on revenue of $885 million, as MarketBeat earnings data for Cadence show. 

Guiding Above Wall Street Views 

For the current quarter, the company guided toward adjusted earnings per share between $1.23 and $1.27. It forecasts revenue between $1.00 billion and $1.02 billion. Wall Street had expected a net income of $1.08 a share and revenue of  $935 million so that guidance gave investors something to cheer about. 

For the fiscal year 2023, Cadence expects total revenue from $4 billion to $4.06 billion, above analysts’ previous estimates of $3.89 billion. Cadence expects net income per diluted share for 2023 in the range of $4.90 to $5. Wall Street was looking for $4.70 a share. 

Greater usage of artificial intelligence/machine learning and 5G communications are among the growth drivers for Cadence. 

Big Chipmakers Among Customers 

Cadence’s customers include top chipmakers, such as Intel Corporation (NASDAQ: INTC), NVIDIA Corporation (NASDAQ: NVDA) and Broadcom Inc. (NASDAQ: AVGO). 

In the earnings conference call, CEO Anirudh Devgan cited several new systems that are growing rapidly, including the company’s Cadence Cerebrus AI-driven technology, which is now deployed at 10 of the top 20 semiconductor companies. Devgan cited Intel, Nvidia, Broadcom, and Samsung Electronics Co. Ltd. (OTCMKTS: SSNLF) as customers having success with Cerebrus. 

Devgan also mentioned the increased use of Cadence’s technologies in the automotive segment for electric vehicles. 

According to MarketBeat analyst data for Cadence, six analysts boosted their price target on the stock following the earnings report. The current price target is $204.62, just a 2.78% upside. 

Rallying To All-Time High

It’s worth looking at the stock’s recent price history, particularly areas between $190 and $195, where it’s hit resistance since late 2021. The upside price movement on February 14 brought Cadence’s price to its all-time high.

It’s not uncommon to see a breakaway gap after a company issues a strong earnings report with better-than-expected guidance. Occasionally other company and industry developments can cause a stock to gap up. These gaps also occur in heavier-than-average trading volume. 

That kind of price action signals institutional investors' conviction in the stock, and it’s the start of a new rally. Because the institutions can take months to amass a full position in a stock, the breakaway gap is often just the beginning of an uptrend. 

You can easily spot Cadence’s February 14 breakaway gap using the stock’s chart, with a bar or candlestick view.  

Cadence shares advanced 9.71% in the past month and 11.26% in the past three months, outpacing its index, the S&P 500. With a market capitalization of $54.61 billion, it easily qualifies for inclusion in the large-cap index.

Biggest Tech-Sector Gainer

Within the S&P Technology sector, which you can track using the Technology Select Sector SPDR Fund (NYSEARCA: XLK), Cadence was the biggest gainer in the February 14 session. 

It’s best to avoid chasing a stock that gaps up, as a pullback, even a small one, is inevitable as investors who bought shares at lower prices pocket some profits. If you chase the stock, be prepared to sit through a pullback to a moving average. If you missed the stock on the day it gapped higher, support at the 5-, 10-, 21- or even 50-day moving average can offer another opportunity to get in.