CDNS: Advanced AI Chip Designs Will Drive Continued Market Leadership

Key Takeaways

• 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

Provides software, hardware, and other services worldwide.

• 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 Future Earnings and Revenue Growth

Assumptions

• 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

• 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

• 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.