Last Update 14 Dec 25

Fair value Increased 0.52%

CDNS: AI And HPC Design Demand Will Drive Shares Higher

Analysts have nudged their price target on Cadence Design Systems higher by $2 to approximately $384 per share, citing sustained strength in advanced chip design activity for artificial intelligence and high performance computing, as well as solid near term growth guidance.

Analyst Commentary

JPMorgan lifted its price target on Cadence Design Systems to $405 from $390 and reiterated an Overweight rating following a strong Q3 print and guidance for another quarter of solid growth. The update has reinforced a broadly constructive view on the company, though some investors remain mindful of valuation and cyclical risks tied to semiconductor spending.

Bullish Takeaways

Bullish analysts highlight Cadence's sustained momentum in advanced chip design for artificial intelligence and high performance compute as a key driver of above market growth and multiple support.
The company’s ability to pair strong Q3 results with guidance for another quarter of solid growth is viewed as evidence of consistent execution and high visibility into its revenue pipeline.
Robust demand for next generation design tools is seen as reinforcing Cadence's pricing power and justifying premium valuation levels relative to traditional EDA peers.
Ongoing share gains in strategic workflows, especially those tied to AI accelerators and data center silicon, are framed as supporting a durable mid to high teens growth algorithm.

Bearish Takeaways

Bearish analysts caution that the shares already embed optimistic assumptions on AI and high performance compute adoption, which leaves less room for multiple expansion if growth normalizes.
There is concern that a slowdown in broader semiconductor capital spending could eventually temper design activity and put pressure on bookings and backlog growth.
Execution missteps in scaling complex AI centric design platforms, including longer deployment cycles or customer delays, could create volatility around quarterly results.
Investors focused on risk reward point to potential margin pressure if Cadence must accelerate investment in R and D and cloud infrastructure to stay ahead of competing design platforms.

What's in the News

Raised full year 2025 outlook to approximately 14% year over year revenue growth, guiding revenue to $5.262 billion to $5.292 billion and GAAP EPS to $3.80 to $3.86, implying GAAP net income of $1.040 billion to $1.056 billion (Key Developments).
Issued fourth quarter 2025 guidance calling for revenue of $1.405 billion to $1.435 billion and GAAP EPS of $1.17 to $1.23, with GAAP net income expected between $319 million and $335 million (Key Developments).
Repurchased 583,872 shares for $200.01 million in the quarter ended September 30, 2025, bringing total buybacks under the February 1, 2017 authorization to 35,657,090 shares, or 12.84 percent of shares, for $4.606 billion (Key Developments).
Cadence Molecular Sciences introduced ROCS X, an AI enabled virtual screening solution built on the Orion Molecular Design Platform that can perform 3D searches across trillions of drug like molecules and delivered a thousand fold performance improvement versus traditional methods in validation tests. General availability is targeted for the first quarter of 2026 (Key Developments).
Announced expanded collaboration with TSMC spanning AI driven EDA, 3D IC design flows and advanced IP on TSMC N3, N2, A16 and upcoming A14 nodes. This includes new HBM4, LPDDR6 and PCIe 7.0 IP aimed at solving memory bandwidth bottlenecks for AI and high performance computing workloads (Key Developments).

Valuation Changes

The Fair Value Estimate has risen slightly, moving about $2 higher from roughly $382.20 to $384.20 per share, reflecting modestly stronger long term fundamentals.
The Discount Rate has edged up marginally, increasing from about 8.49% to 8.51%, indicating a slightly higher assumed cost of capital.
Revenue Growth has improved very slightly, with the long term growth assumption ticking up from approximately 11.35% to 11.36% annually.
The Net Profit Margin has slipped modestly, easing from around 24.42% to 24.33%, suggesting a small reduction in expected long run profitability.
The Future P/E has risen slightly, increasing from about 73.9x to 74.6x, implying a marginally higher valuation multiple on forward earnings.

Strategic AI-driven tools and partnerships with major players fuel robust growth, revenue prospects, and competitive advantages for Cadence.
Diversified supply chain, cloud adoption, and share buybacks bolster resilience and enhance earnings potential amid uncertainties.
Geopolitical risks, reliance on key partnerships, and competitive pressures could impact Cadence's supply chain, operational efficiency, and ability to maintain market position.

Catalysts

About Cadence Design Systems

Provides software, hardware, and other services worldwide.What are the underlying business or industry changes driving this perspective?

Cadence's strategic investments in AI-driven design and verification tools are expected to drive future revenue growth, as the company reports increasing adoption of its AI-enabled offerings, such as the Cadence Cerebrus AI solution and SimAI, which have shown significant performance improvements for customers.
The company is seeing strong demand in its IP business, with a 40% year-over-year growth in Q1 2025 driven by AI, chiplet-based architectures, and new foundry opportunities, which is likely to contribute positively to future revenues.
Cadence's diversified supply chain and robust software model, including accelerated cloud adoption, provide resilience against macroeconomic uncertainties, which is forecasted to sustain continued revenue and earnings growth.
The expanding partnership with major industry players like NVIDIA and Intel, including initiatives such as 3D-IC and data center digital twins, positions Cadence for future competitive advantages and new revenue streams.
Cadence's ongoing share buyback program, using at least 50% of their annual free cash flow, is expected to enhance earnings per share (EPS) by reducing the share count over time.

Cadence Design Systems Earnings and Revenue Growth

Cadence Design Systems Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Cadence Design Systems's revenue will grow by 10.9% annually over the next 3 years.
Analysts assume that profit margins will increase from 19.9% today to 24.6% in 3 years time.
Analysts expect earnings to reach $1.7 billion (and earnings per share of $6.73) by about September 2028, up from $1.0 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 $870.0 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.9x on those 2028 earnings, down from 97.4x today. This future PE is greater than the current PE for the US Software industry at 36.2x.
Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Cadence Design Systems Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Potential geopolitical risks and ongoing tariff concerns, especially regarding US-China relations, could impact Cadence’s supply chain and customer demand, potentially affecting revenue and operating margins.
The company's reliance on key partnerships, such as with NVIDIA, presents execution risks; any disruption or failure to maintain these collaborations could affect growth projections and earnings.
The acquisition of ARM's Artisan foundation IP business and other recent acquisitions present integration risks; any challenges could impact operational efficiency and net margins.
The company's substantial presence in China is exposed to geopolitical risks and economic fluctuations, which could create volatility in revenue, especially if political tensions or regulatory changes impact business operations.
Competitive pressures in the expanding AI-driven design tools market could impact Cadence's ability to maintain its market position and price premium, potentially affecting revenue growth and operating margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $369.573 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 $410.0, and the most bearish reporting a price target of just $200.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 73.9x, assuming you use a discount rate of 8.5%.
Given the current share price of $361.77, the analyst price target of $369.57 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
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.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

CDNS: Advanced AI Chip Designs Will Drive Continued Market Leadership