CDNS Cadence Design Systems
Wonderful EDA duopoly with deepening moat, but priced for perfection at 25% implied growth.
The business
Cadence sells electronic design automation (EDA) software that chipmakers use to design, simulate, and verify semiconductors. It operates in a entrenched duopoly with Synopsys, earning recurring license and subscription revenue from the world's largest semiconductor and systems companies.
Quality gate · 90/100
Moat & management
| Moat | wide moat |
| Source | switching costs |
| Trajectory | widening |
| Management | excellent |
Chip design flows are deeply integrated into EDA toolchains; switching risks costly re-validation and tape-out errors in a billion-dollar chip program. As chip complexity rises with advanced nodes and 3D packaging, the depth and breadth of required tools increases, reinforcing Cadence's lock-in alongside its duopoly with Synopsys.
Net cash balance sheet, ~100%+ FCF conversion, modest share buybacks, and disciplined reinvestment in R&D at high returns. They act like owners, not empire-builders.
Owner-earnings inputs
| Owner earnings (TTM) | 1.52B |
| Owner-earnings yield | 1.7% |
| Free-cash-flow yield | 1.9% |
| Growth used (normalized) | 10.0% |
| Market-implied growth (reverse DCF) | 25.0% |
| Terminal growth | 3.0% |
| Discount rate (hurdle) | 9.8% |
Projected owner earnings
| Yr | Owner earnings | Growth | PV |
|---|---|---|---|
| 1 | 1.66B | 10.0% | 1.51B |
| 2 | 1.82B | 9.5% | 1.51B |
| 3 | 1.98B | 9.0% | 1.50B |
| 4 | 2.15B | 8.5% | 1.48B |
| 5 | 2.32B | 8.0% | 1.45B |
| 6 | 2.50B | 7.5% | 1.42B |
| 7 | 2.67B | 7.0% | 1.39B |
| 8 | 2.84B | 6.5% | 1.34B |
| 9 | 3.01B | 6.0% | 1.30B |
| 10 | 3.18B | 5.5% | 1.25B |
| 11 | 3.34B | 5.0% | 1.19B |
| 12 | 3.49B | 4.5% | 1.13B |
| 13 | 3.63B | 4.0% | 1.07B |
| 14 | 3.76B | 3.5% | 1.01B |
| 15 | 3.87B | 3.0% | 948.85M |
Key risks
- Market prices in ~25% growth — extreme valuation leaves no margin of safety
- Duopoly partner Synopsys could aggressively compete on price or win share in key segments
- Semiconductor cyclicality could compress near-term bookings and revenue
Catalysts
- AI/accelerator chip boom drives demand for more advanced verification and sign-off tools
- Expansion into system-level design and digital twins broadens TAM
- Continued share repurchases compound per-share value
Recent news
score · 8 articles
- 2 Profitable Stocks to Keep an Eye On and 1 Facing Headwinds
- 5 Revealing Analyst Questions From Cadence Design Systems’s Q2 Earnings Call
- The Quiet Surface of Synopsys Stock Hides a Turbulent Forecast
- Prediction: Synopsys Could Become the Next $150 Billion Software Giant
- Cadence Q2 Earnings Top Estimates on AI Demand, Backlog Hits $8.1B
- Are Computer and Technology Stocks Lagging ACI Worldwide (ACIW) This Year?
- CDNS Q2 Deep Dive: AI-Driven Solutions and Strategic Partnerships Fuel Growth
- Nvidia (NVDA) Pours $5 Billion Into Safe AI And Expands Data Center Reach
⚠ maintenance capex ≈ min(capex, D&A), capped at FCF · Net cash 0.4B credited to value (interest stripped from owner earnings to avoid double-counting). · Price pays for ~25%/yr owner-earnings growth over 15y (reverse DCF); model credits 10%. · Rich vs our conservative value, but a quality business is not a short — stance is WAIT for a better price, not sell.