NVIDIA, Qualcomm And Marvell Partnerships Will Expand AI Capabilities

Key Takeaways

• Strategic partnerships and expansion in AI are driving demand, boosting future revenue through enhanced productivity and optimization.
  
• Growth in system design, strengthened by investments in IP business and acquisitions, promises enhanced revenue, margin expansion, and stable earnings.
  
• Geopolitical risks and variable hardware sales cycles could challenge revenue stability, while reliance on AI needs flawless execution against competition.

Catalysts

Provides software, hardware, and other services worldwide.

• Cadence's strategic partnerships and expanded collaborations with leading technology companies like NVIDIA, Qualcomm, and Marvell are driving demand for its AI-driven products, which are expected to significantly boost future revenue.
  
• The company's expansion in AI applications, including AI-powered product offerings such as Cadence Cerebrus and Allegro X AI, is anticipated to drive future earnings growth through increased productivity and optimization for customers.
  
• Strong growth in Cadence's system design and analysis business, especially in aerospace, defense, and automotive verticals, is expected to enhance revenue and net margins as these sectors invest in advanced technology solutions.
  
• The record backlog of $6.8 billion indicates sustained demand and provides revenue visibility and stability, which can positively impact earnings predictability and growth.
  
• Cadence's investment in and focus on IP business expansion, including the acquisition of Secure-IC, is expected to enhance future revenue streams through an enriched portfolio and greater engagement with top-tier customers.

Cadence Design Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cadence Design Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cadence Design Systems's revenue will grow by 13.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 22.7% today to 32.1% in 3 years time.
• The bullish analysts expect earnings to reach $2.2 billion (and earnings per share of $8.04) by about April 2028, up from $1.1 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 bullish analyst cohort, the company would need to trade at a PE ratio of 57.6x on those 2028 earnings, down from 67.1x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• 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 7.69%, as per the Simply Wall St company report.

Cadence Design Systems Future Earnings Per Share Growth

Risks

• The company's assumption that China revenue will be flat year-over-year in 2025 due to historical unpredictability and macro uncertainties suggests potential headwinds impacting overall revenue growth.
  
• Cadence's business exposure to export control regulations and potential changes in entity lists related to China could adversely affect their revenue and net margins due to geopolitical risks.
  
• The deceleration in recurring revenue growth, despite strong market opportunities in AI and other sectors, could indicate challenges in maintaining sustained revenue expansion in core EDA segments.
  
• The company's reliance on a strong hardware sales cycle, which has variable visibility beyond mid-year, could impact revenue dependability if customer demand shifts unexpectedly.
  
• Significant anticipated reliance on AI-driven product developments means execution risks could impact earnings if innovation does not meet market adoption expectations or if competitors develop superior solutions.

Valuation

• The assumed bullish price target for Cadence Design Systems is $355.0, which is the highest price target estimate amongst analysts. 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 bullish end of the spectrum.
• 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 $200.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 57.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of $258.15, the bullish analyst price target of $355.0 is 27.3% 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.