Damo financial outlook: Keng Teng Electronics (CDNS.US) Q3 performance is expected to grow steadily and commercialization of AI design tools becomes a key highlight

The Zhitong Finance App learned that in the latest research report released on October 20, Morgan Stanley pointed out that with the increasing complexity of artificial intelligence (AI) chip design and the gradual expansion of the application of AI tools in semiconductor R&D processes, electronic design automation (EDA) software giant Keng Teng Electronics (CDNS.US) is expected to usher in a new round of growth opportunities. The bank believes that AI-driven design tools and intelligent workflows will be an important growth driver for the company in the future, and maintain its “gain” rating and target price of $400. Based on the closing price of 319.51 US dollars on October 16, the target price is about 25% higher than the stock price at the time.

Keng Teng Electronics will announce its results for the third quarter of 2026 on October 26. Morgan Stanley expects the company to continue its steady growth momentum since this year, but since the market already has high expectations for its performance that has continuously exceeded expectations, simply handing over strong financial reports may not be enough to drive the stock price to rise markedly. Investors are more concerned about whether management can clearly explain how the popularity of AI technology will turn into additional revenue and profits.

Morgan Stanley expects Keng Teng Electronics' third-quarter revenue to be about US$1,612 million, up about 20% year on year, which is basically in line with the company's previous guidance range of US$1,595 billion to US$1,625 billion and the agreed market expectations of US$1,615 billion. Non-GAAP diluted earnings per share are expected to be $2.07, slightly higher than market expectations of $2.05, and at the upper end of the company's previous guidance range of $2.01 to $2.07.

The bank also expects that the backlog of orders at the end of the third quarter will further increase from the record US$8.1 billion in the second quarter to US$8.2 billion. Continued growth in order reserves reflects active advanced chip design activities and provides high visibility into future revenue.

Judging from the business structure, Morgan Stanley expects that the three major business areas of EDA software, intellectual property (IP) licensing, and system design and analysis under Keng Teng Electronics will maintain strong performance. Among them, the growth rate of the IP business is expected to continue to exceed the company's overall level.

In the last quarter, Keng Teng Electronics' IP business revenue increased by about 40% year on year, becoming an important driving force for performance growth. Morgan Stanley believes that demand for advanced process chip development continues to expand and will continue to push customers to purchase related design IP. In particular, in the context of increasingly complex chip architectures and increased customized chip development activities, the IP business still has strong potential for growth.

Meanwhile, major semiconductor manufacturers such as Intel (INTC.US), Samsung, and TSM.US (TSM.US) continue to advance advanced process research and development, which is also expected to support Kengteng Electronics' EDA business. Morgan Stanley expects management to further introduce the company's progress in the field of design and process collaborative optimization (DTCO) and the application of related technologies in advanced chip manufacturing in the financial report.

However, compared to the steady growth of traditional EDA business, Morgan Stanley believes that the commercialization prospects of AI design tools are the most noteworthy topic in this financial report. As AI model developers and large technology companies increase investment in custom chip research and development, the scope and complexity of semiconductor design activities is expanding. This not only increases the demand for the use of traditional EDA tools, but also creates a new market space for AI-driven automated design platforms.

Kengteng Electronics has continued to expand its ChipStack product portfolio in recent years, including AI-related design tools such as ViraStack and Aura Stack. According to information previously disclosed by the company, ChipStack has received more than 20 customer collaborations or application projects. Morgan Stanley expects management to further explain customer adoption of related products and actual application progress in this financial report.

The bank believes that the revenue contribution of these new products may be more pronounced in 2027. As AI tools gradually participate in chip design, verification and optimization, Keng Teng Electronics is expected to explore new commercialization models in addition to traditional software licensing.

Among them, pay-per-use charges may become an important direction. Keng Teng Electronics has previously stated that the usage-based pricing model can complement the traditional software licensing model. Morgan Stanley believes that with the gradual spread of AI agents that can perform some design tasks independently, this charging method may enable the company to more directly benefit from customer design activities and increased tool usage.

For example, as AI agents can automatically perform more chip design and verification tasks, the frequency and computational resource consumption of customers using EDA tools may increase accordingly. If Keng Teng Electronics can turn this portion of incremental usage demand into revenue, it is expected that its long-term profitability will be further improved.

However, Morgan Stanley emphasized that there is still a need to establish a more clear link between the adoption of AI tools and commercial revenue. Investors want to know not only how many customers are starting to use related products, but also how these tools can increase customer willingness to pay, and ultimately how much additional profit can be brought to Kengteng Electronics.

Notably, after competitor Synopsys (SNPS.US) recently held an Investor Day, the market is paying more attention to cooperation between EDA companies and large AI model developers. However, Morgan Stanley does not expect Keng Teng Electronics to announce a major AI cooperation agreement similar to Synopsys in this financial report. The bank believes that Keng Teng Electronics is more likely to emphasize that its design tools have been widely used by many AI model developers rather than highlight a single partner.

In terms of financial prospects, Morgan Stanley expects Keng Teng Electronics' annual revenue to reach US$6.324 billion in 2026, up 19.4% year on year; further increase to US$7.366 billion in 2027, up about 16.5% year on year; and expected to reach US$8.323 billion in 2028.

In terms of profit, the bank expects the company's non-GAAP diluted earnings per share to be $8.35 in 2026, increase to $9.82 in 2027, and reach a further $11.43 in 2028. As revenue scale expands and operating efficiency improves, the non-GAAP operating margin is expected to increase to 46.1% in 2027 from 44.6% in 2026.

Morgan Stanley believes that Kengteng Electronics' long-term competitive advantage comes not only from its leading position in analog and mixed-signal chip design, but also from system analysis and simulation capabilities, deep customer relationships, and an expanding AI-driven EDA product portfolio.

In terms of valuation, the bank pointed out that Keng Teng Electronics' current projected price-earnings ratio for the 2027 fiscal year is lower than its historical average, reflecting that the market still has doubts about whether the big AI model may replace some traditional EDA functions.

However, Morgan Stanley believes that AI is more likely to be a factor driving the increase in demand for EDA tools rather than simply replacing existing design software. With the gradual spread of AI-assisted chip design, Kengteng Electronics is expected to benefit from this trend with its existing technology and customer base.

Based on the expected earnings per share of $9.82 in 2027 and a price-earnings ratio of approximately 41 times, Morgan Stanley maintains Keng Teng Electronics' target price of $400. Under an optimistic scenario, if chip design activities and commercialization of AI tools progress faster than expected, the bank believes that the stock price may reach 600 US dollars; under a pessimistic scenario where macroeconomic weakness and semiconductor R&D spending falls significantly, the stock price may fall to 200 US dollars.