US-China Frictions And Open-Source Trends Will Dampen EDA Prospects

Key Takeaways

• Growing adoption of open-source alternatives, stronger competition, and customer concentration risk threaten pricing power, revenue growth, and earnings stability.
  
• Geopolitical tensions and maturing semiconductor trends may restrict market access and limit long-term expansion opportunities.
  
• Strong demand for AI-driven tools, diversified growth, and leadership in emerging chip technologies position Cadence for recurring revenue, margin expansion, and sustained long-term earnings stability.

Catalysts

Provides software, hardware, and other services worldwide.

• The rapid, ongoing shift toward open-source and low-cost alternatives in design and engineering software threatens Cadence's proprietary EDA tools, eroding pricing power and significantly pressuring future gross and operating margins as customers increasingly seek more cost-efficient options.
  
• Escalating geopolitical tensions and tightening export controls, especially between the US and China, risk further restricting Cadence's access to one of its largest international markets; any loss of China-related revenues or inability to transact freely could permanently stunt top-line revenue growth and undermine long-term earnings.
  
• Heavy reliance on large, sophisticated customers increases Cadence's vulnerability to customer concentration risk; any insourcing, competitive switch, or renegotiation by a few of these clients could create significant revenue volatility and abrupt compression in net margins.
  
• Intensifying competition from Synopsys and emerging EDA players-many leveraging aggressive pricing strategies and disruptive SaaS/cloud-based business models-may result in reduced software licensing fees and recurring revenue growth deceleration, which poses downside risk to both annual revenue and free cash flow visibility.
  
• The maturation of semiconductor manufacturing and a potential slowdown in Moore's Law may result in a reduced pace of new chip design starts, moderating secular growth in demand for Cadence's advanced EDA tools, and thereby capping future recurring revenue and margin expansion potential.

Cadence Design Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cadence Design Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cadence Design Systems's revenue will grow by 9.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 19.9% today to 14.1% in 3 years time.
• The bearish analysts expect earnings to reach $942.8 million (and earnings per share of $5.89) by about July 2028, down from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 96.9x on those 2028 earnings, down from 100.1x today. This future PE is greater than the current PE for the US Software industry at 46.9x.
• Analysts expect the number of shares outstanding to decline by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Cadence Design Systems Future Earnings Per Share Growth

Risks

• Demand for Cadence's AI-driven tools and system design platforms is accelerating due to the exponential increase in chip complexity for AI, HPC, edge, and automotive applications, which supports strong, long-term revenue and profit growth.
  
• The company has reported broad-based bookings and backlog strength across all geographies, with particular growth in non-China regions offsetting any temporary export restrictions, indicating durable and diversified revenue streams.
  
• Structural growth drivers such as adoption of 3D-IC, chiplet architectures, and advanced packaging are in early innings, with Cadence uniquely positioned as the platform of choice alongside deep partnerships with all major foundries and hyperscalers, which enhances customer stickiness and visibility into future earnings.
  
• Cadence's investments and gains in high-value adjacent businesses like IP (posting multiple quarters of 25%+ year-over-year growth), hardware, and system analysis provide new sources of recurring revenue and margin expansion, increasing both average deal size and total addressable market.
  
• Shifts toward agentic AI, workflow automation, and the proliferation of new customer segments (including hyperscalers, automotive, and system companies) are likely to support both software revenue and premium pricing, leading to sustained high operating margins and long-term earnings resilience.

Valuation

• The assumed bearish price target for Cadence Design Systems is $274.28, which represents two standard deviations below the consensus price target of $366.05. This valuation is based on what can be assumed as the expectations of Cadence Design Systems's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $410.0, and the most bearish reporting a price target of just $200.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $942.8 million, and it would be trading on a PE ratio of 96.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $371.03, the bearish analyst price target of $274.28 is 35.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.