Has The Pullback In Cadence Design Systems (CDNS) Created A Fair Entry Point?

• If you are looking at Cadence Design Systems and wondering whether the recent price gives you fair value or not, this article will walk through what the numbers actually say.
• The stock last closed at US$283.46, after a 5.2% decline over the past week and a 10.7% decline over the past month, while still showing a 47.1% return over 3 years and 113.8% over 5 years.
• Recent moves in the share price are drawing renewed attention to how much investors are willing to pay for Cadence Design Systems today. With the stock down 8.7% year to date and 5.6% over the past year, many holders are asking whether this is simply a pause after strong multi year gains or a signal that expectations are being reassessed.
• On Simply Wall St's valuation checks, Cadence Design Systems scores 1 out of 6 for being undervalued, which you can see in more detail in the valuation score. Next, we will look at the usual valuation approaches before considering a more rounded way to judge value at the end of the article.

Cadence Design Systems scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Cadence Design Systems Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes the cash Cadence Design Systems is expected to generate in the future, then discounts those projected cash flows back to today to estimate what the business could be worth per share.

Cadence currently has last twelve month Free Cash Flow of about US$1.47b. Based on analyst inputs for the coming years and then extrapolations by Simply Wall St, projected Free Cash Flow reaches about US$5.05b in 2035. These projections are generated using a 2 Stage Free Cash Flow to Equity model that first uses explicit analyst forecasts, then gradually tapers growth assumptions over the longer term.

When all those future cash flows are discounted back, the model arrives at an estimated intrinsic value of around US$245.41 per share. Compared with the recent share price of US$283.46, this implies the stock screens as roughly 15.5% overvalued on this DCF view.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Cadence Design Systems may be overvalued by 15.5%. Discover 56 high quality undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Cadence Design Systems.

Approach 2: Cadence Design Systems Price vs Earnings

For a profitable company like Cadence Design Systems, the P/E ratio is a common way to think about value because it links what you pay per share to the earnings that support that price. In general, higher expected growth and lower perceived risk can justify a higher P/E, while lower growth or higher risk usually point to a lower, more conservative P/E range.

Cadence currently trades on a P/E of 72.72x. That is well above the Software industry average of 25.38x and also higher than the peer average of 35.99x. Simply Wall St’s Fair Ratio for Cadence is 36.44x, which is its proprietary estimate of what a reasonable P/E might look like given factors such as earnings growth, profit margins, industry, market cap and company specific risks.

This Fair Ratio is more tailored than a straight comparison with peers or the broader industry because it adjusts for company specific characteristics rather than assuming all software stocks should trade on similar multiples. Comparing the current P/E of 72.72x with the Fair Ratio of 36.44x, the shares screen as significantly more expensive than this customised benchmark.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Cadence Design Systems Narrative

Earlier we mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach a clear story about Cadence Design Systems to your numbers, link that story to a forecast for revenue, earnings and margins, and then compare your implied fair value with the current price. The system updates your view automatically when fresh news or earnings arrive. One investor might build a more cautious Cadence story that lines up with a US$200 fair value, while another leans into an optimistic AI and chiplet thesis closer to US$410. Both can quickly see whether their chosen Narrative suggests Cadence looks cheap or expensive today and decide what that means for their own buy or sell timing.

Do you think there's more to the story for Cadence Design Systems? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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