Looking at Cadence Design Systems, Inc.’s (NASDAQ:CDNS) fundamentals some investors are wondering if its last closing price of $42.31 represents a good value for money for this high growth stock. Let’s look into this by assessing CDNS’s expected growth over the next few years.
See our latest analysis for Cadence Design Systems
What can we expect from CDNS in the future?
Cadence Design Systems’s growth potential is very attractive. The consensus forecast from 9 analysts is extremely bullish with earnings per share estimated to surge from current levels of $0.851 to $1.49 over the next three years. This indicates an estimated earnings growth rate of 16% per year, on average, which indicates an exceedlingly positive future in the near term.
Is CDNS’s share price justified by its earnings growth?
As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” Cadence Design Systems is available at price-to-earnings ratio of 49.7x, showing us it is overvalued compared to the US market average ratio of 16.45x , and overvalued based on current earnings compared to the Software industry average of 41.35x .
We understand CDNS seems to be overvalued based on its current earnings, compared to its industry peers. However, to properly examine the value of a high-growth stock such as Cadence Design Systems, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 49.7x and expected year-on-year earnings growth of 16% give Cadence Design Systems a quite high PEG ratio of 3.07x. Based on this growth, Cadence Design Systems’s stock can be considered overvalued , based on its fundamentals.
What this means for you:
CDNS’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are CDNS’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CDNS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CDNS’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.