The stock of Cadence Design Systems Inc (CDNS, Financial) experienced a daily loss of -2.87% and a 3-month loss of -0.31%. With an Earnings Per Share (EPS) of 3.26, the question arises: Is the stock modestly overvalued? This article delves into a comprehensive valuation analysis of Cadence Design Systems (CDNS) that will answer this question. Read on to explore the intrinsic value of this stock.
Company Overview
Cadence Design Systems is a leading provider of electronic design automation software, intellectual property, and system design and analysis products. Its EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. 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. This digitalization of various end markets benefits EDA vendors like Cadence Design Systems.
As of September 15, 2023, Cadence Design Systems (CDNS, Financial) has a stock price of $235.84, compared to its GF Value of $208.44, indicating a modest overvaluation. With a market cap of $64.10 billion and sales of $3.80 billion, it's crucial to delve deeper into the company's value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally be traded at.
Given that Cadence Design Systems' stock price is significantly above the GF Value Line, it is considered modestly overvalued. This overvaluation suggests that the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with weak financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Cadence Design Systems has a cash-to-debt ratio of 1.35, which is worse than 61.23% of 2752 companies in the Software industry. However, its overall financial strength is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies carries less risk, especially if they've demonstrated consistent profitability over the long term. Cadence Design Systems has been profitable 10 years over the past 10 years. With revenues of $3.80 billion and an operating margin of 28.78%, better than 94.87% of 2731 companies in the Software industry, Cadence Design Systems' profitability is strong.
Growth is a crucial factor in a company's valuation. Cadence Design Systems' growth is better than 67.51% of 2413 companies in the Software industry, with a 3-year average revenue growth rate and a 3-year average EBITDA growth rate of 25.5%.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. Cadence Design Systems' ROIC is 22.35, and its WACC is 10.5, indicating value creation for its shareholders.
Conclusion
Overall, Cadence Design Systems' stock is considered modestly overvalued. Despite this, the company's financial condition is strong, and its profitability is robust. Its growth ranks better than 74.37% of 2009 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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