Stockchase InsightsCadence Design SystemsCDNSBUY ON WEAKNESSMay 29, 2023

CDNS has a strong track record of execution and is now trading at 44x times' Forward P/E (historical averages in the last five years ranging from 27x – 46x). Revenue and EBITDA have been consistently growing at around 13% and 20%, respectively. The balance sheet is solid, with net cash of around $200M. The company is generating tons of cash and returns most of it through repurchases, which we like. The Q1 was mixed, but it raised guidance, underlining the belief that the company benefits from secular trends fueling demand for its software and other tools used to design semiconductors. This is despite weaker end-market demand for some chips and tightened US export laws aimed at China. Trends are sparking more, and more complicated, chip designs that are critical to customers' R&D initiatives. Operating margin fell in 1Q vs. the prior year on a tough comparison, yet it should rise for the year on more revenue and Cadence's strong competitive position. Upfront sales (20% of total in 1Q), such as hardware and some IP products, can create lumpiness in revenue. Overall, we like the name, momentum looks good, and the company has a track record of consistent growth and shareholder-friendly policies over the last few years. Having said that, it is rarely trading cheaply given, CDNS’s valuation is at a premium level compared to peers and the market most of the time, which already reflects the high quality of the business. We would be nibble here and there and averge into the position over time.
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