I love technology companies! With low competition they can set high margins, no need for price war, to put sweet thick income in their pockets. And where does the income go? To finance expansion of course to reach more customers and get more sales.
Now I want to talk about Cadence (CDNS, Financial), it is an Electronic Design Automation (EDA) software and hardware provider whose products are used by engineers to design and verify integrated circuits (ICs), printed circuit boards (PCBs), and other electronic systems. In short, they have specific clientele to serve and need their expertise from time to time.
Cadence has a strong presence and reputation for its technology and is one of top three EDA companies in the world along with Synopsys and Ansys.
Cadence has their revenue growth at 10 year CAGR of 11.8% and 5 year CAGR of 14.8% from $1.5 billion of sales in 2014 to $4.0 billion in 2023. And their gross margins are around 85% to 89% every year. While Cadence's net margins stand at 22% to 25% per year. So with $4.16 billion of sales in 2023, $1 billion is the net income. That is huge!
Other industries, especially energy companies like coal and oil, require more cost of their sales leaving gross margin below 20%. But in industry technology which is less labor-intensive and has minimal competition, they can pocket more.
With more money in hand, Cadence make some acquisition to add to their product portfolio such as BETA CAE Systems International AG in 2024, that provides multi-physics simulation software, acquired for $1.2 billion and Pointwise, Inc. also in 2024, that develops mesh generation software for computational fluid dynamics simulations. And the list goes on.
And therefore we shall see their financial positions to be like this:
Cadence is one of many companies with the idea of “bigger is better” and that is why they are so spirited to acquisitions to add more to their portfolio. We can see they are in constant struggle with their cash and debt. Sometimes debt balances the cash and many times their debt is below their cash amount.
For valuation with current price of $270, Cadence has their price to earning ratio at 69.81x. When compared to their industry median of 26x, Cadence is considered overvalued. What about dividends? Unfortunately Cadence doesn't pay dividends to their shareholders.
Key Takeaway
Cadence is a good stock with their revenue growth of 11-14% per year, and 25% of net margins. Considered to be solid and reliable with consistent growth. And financial health is considered moderate. Last but least, Cadence is overvalued, good stock attracts more investors for sure. If they distribute dividends it would be great but unfortunately no, they don't. If you want a quick analysis of Cadence you can check the GF Score of Cadence:
In case you don't know GF Score, it is a chart with 5 measurements provided by GuruFocus to allow their customers to get a quick performance glimpse of a stock. The chart gives a quick view of how well the profitability, financial strength, growth and price momentum of a stock.
Cadence's GF Score gives a quick interpretation that Cadence has a very good profitability with good sales growth but with moderate financial strength, overvalued price and technically not in a good momentum.
Find out more about Cadence's performance by visiting GuruFocus now!
