Partnerships With NVIDIA, Qualcomm, And Marvell Will Expand AI Solutions In High-Growth Markets

Key Takeaways

• Strong AI demand and strategic partnerships are expected to drive revenue growth, enhancing market penetration in high-growth industries.
  
• Expansion in hardware solutions and specific sectors forecasts increased earnings and margin opportunities, supported by acquisitions and AI-driven product adoption.
  
• Slowed growth in China, cautious guidance, and expense timing shifts could challenge Cadence's long-term revenue and margin stability amid macroeconomic uncertainties.

Catalysts

Provides software, hardware, and other services worldwide.

• The AI super cycle, with increasing demand for generative AI and physical AI, is expected to drive robust growth, positively impacting Cadence's revenue and earnings due to increased adoption of its AI-driven solutions.
  
• Strengthened partnerships with key players like NVIDIA, Qualcomm, and Marvell are likely to enhance Cadence's penetration in high-growth markets, thus boosting revenue and potentially leading to increased earnings through expanded customer bases.
  
• The adoption and growing demand for Cadence's hardware solutions, particularly the Palladium Z3 and Protium X3 systems, suggest potential acceleration in hardware revenue and overall earnings growth due to their leading-edge capabilities and high customer demand.
  
• Expansion in system design and analysis, with particular growth in the automotive, aerospace, and defense verticals, coupled with increasing adoption of AI-driven products like Allegro X AI, indicates strong forward-looking revenue opportunities and margin expansion.
  
• Cadence's IP business saw significant growth, driven by demand for AI, HPC protocols, and new acquisitions like Secure-IC, suggesting potential for continued strong revenue contributions and higher net margins from improved product offerings and increased market share.

Cadence Design Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cadence Design Systems's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.7% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $6.37) by about March 2028, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.2x on those 2028 earnings, down from 65.9x today. This future PE is greater than the current PE for the US Software industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Cadence Design Systems Future Earnings Per Share Growth

Risks

• The company's growth in China has slowed down, with only flat revenue expected in 2025 due to unpredictable market dynamics and export restrictions, which could impact overall revenue projections.
  
• The core EDA segment showed only high single-digit growth in 2024, indicating potential pressure or challenges in maintaining double-digit growth, which could affect long-term revenue growth trajectories.
  
• Despite strong hardware demand, visibility into the hardware revenue pipeline beyond the first half of the year is limited, introducing potential variability in second-half earnings.
  
• There is a cautious approach to guidance due to macroeconomic uncertainties, potentially affecting expense management and profit margins.
  
• The transition of the salary merit cycle to start in January instead of mid-year could lead to earlier-than-usual increases in operating expenses, impacting net operating margins in the first half of 2025.

Valuation

• The analysts have a consensus price target of $318.985 for Cadence Design Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $355.0, and the most bearish reporting a price target of just $225.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.5 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 64.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $253.88, the analyst price target of $318.98 is 20.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.