On August 23, 2023, Cadence Design Systems Inc (CDNS, Financial) closed at a price of $231.49, reflecting a daily gain of 2.65% and a three-month gain of 11.75%. Despite these positive trends, the question remains: Is Cadence Design Systems modestly overvalued? With an Earnings Per Share (EPS) (EPS) of 3.26, the answer to this question requires a comprehensive valuation analysis. Let's delve deeper into the company's financials and intrinsic value.
Introduction to Cadence Design Systems Inc (CDNS, Financial)
Cadence Design Systems is a leading provider of electronic design automation software, intellectual property, and system design and analysis products. The company's EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. Cadence offers a portfolio of design IP, as well as system design and analysis products, which enable system-level analysis and verification solutions.
The company's comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house semiconductor design. The resulting expansion in EDA customers, alongside secular digitalization of various end markets, benefits EDA vendors like Cadence.
As of the date of analysis, Cadence Design Systems Inc (CDNS, Financial) has a market cap of $62.90 billion, with a stock price of $231.49 per share. The company's fair value, as estimated by the GF Value, is $206.6, indicating that the stock is modestly overvalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. Based on this analysis, Cadence Design Systems (CDNS, Financial) is believed to be modestly overvalued.
Because Cadence Design Systems is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength of Cadence Design Systems (CDNS, Financial)
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Cadence Design Systems has a cash-to-debt ratio of 1.35, which ranks worse than 61.64% of 2690 companies in the Software industry. The overall financial strength of Cadence Design Systems is 8 out of 10, which indicates that the financial strength of Cadence Design Systems is strong.
Profitability and Growth of Cadence Design Systems
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Cadence Design Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.80 billion and Earnings Per Share (EPS) of $3.26. Its operating margin is 28.78%, which ranks better than 94.6% of 2722 companies in the Software industry. Overall, the profitability of Cadence Design Systems is ranked 10 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Cadence Design Systems's 3-year average revenue growth rate is better than 67.38% of 2391 companies in the Software industry. Cadence Design Systems's 3-year average EBITDA growth rate is 25.5%, which ranks better than 74.05% of 1992 companies in the Software industry.
ROIC vs WACC of Cadence Design Systems
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Cadence Design Systems's ROIC is 22.35 while its WACC came in at 10.29.
Conclusion
In conclusion, the stock of Cadence Design Systems Inc (CDNS, Financial) is believed to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 74.05% of 1992 companies in the Software industry. To learn more about Cadence Design Systems stock, you can check out its 30-Year Financials here.
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