We came across a bullish thesis on Cadence Design Systems, Inc. (CDNS) on Substack by The Equity Analyst. In this article, we will summarize the bulls’ thesis on CDNS. Cadence Design Systems, Inc. (CDNS)’s share was trading at $305.63 as of Feb 10th. CDNS’s trailing and forward P/E were 80.43 and 44.44 respectively according to Yahoo Finance.
A close-up of a semiconductor component, highlighting its complex design.
Cadence, a leader in electronic design automation (EDA) software, has played a crucial role in the evolution of semiconductor design, particularly in the face of increasing complexity in chip development. Founded in 1988, Cadence was born out of the merger of SDA Systems and ECAD and quickly became a key player by pioneering tools that automated chip layout and verification processes. Its tools helped engineers move from manual, error-prone methods to more efficient and accurate designs. Over the years, Cadence’s strong focus on the back-end of chip design—especially physical layout and verification—set it apart from its competitors, like Synopsys, which specialized in front-end logic synthesis.
As the demand for more complex chips grew, driven by Moore’s Law and the proliferation of mobile devices, Cadence’s software offerings expanded to meet the evolving needs of the semiconductor industry. The company’s tools are now integral to designing chips used in everything from smartphones to autonomous vehicles. The shift from proprietary, in-house design tools to third-party EDA software, particularly with the rise of the fabless model, provided Cadence with a growing customer base, including major semiconductor companies like Nvidia, AMD, and Intel.
The company’s business model transitioned from selling licenses for its software to a subscription-based pricing model in recent years, boosting its customer retention and recurring revenue streams. Cadence boasts a customer retention rate of around 95%, underlining the loyalty it has built in the market. This transition, coupled with industry growth and its expanding product suite, has led to impressive financial performance and a significant market share.
Cadence also found an additional revenue stream in semiconductor intellectual property (IP), selling pre-verified blocks for chips, such as Wi-Fi or PCIe controllers, which are critical for speeding up development cycles. Its IP offerings are increasingly intertwined with its EDA tools, enabling companies to integrate tested components seamlessly into their designs. This combination has given Cadence a significant edge in providing comprehensive solutions that go beyond traditional chip design tools.
Cadence’s dominance is reinforced by the high barriers to entry in the EDA and IP markets. Developing competitive EDA tools requires immense resources for research and development, industry-standard compliance, and integration with foundries. Moreover, the entrenched position of Cadence in the ecosystem makes it incredibly difficult for startups to challenge its market share. With established customer relationships and deep technical expertise, Cadence continues to solidify its place as the go-to provider for semiconductor design and IP solutions.
Looking ahead, the growing complexity of semiconductor designs, spurred by advances in AI and the adoption of multi-die architectures, is likely to benefit Cadence. Its advanced tools are essential for connecting multiple chiplets in these new designs, ensuring that the company remains central to the future of semiconductor innovation. With a strong track record, loyal customer base, and robust product portfolio, Cadence is well-positioned to continue its leadership in the semiconductor design space, benefiting from the ongoing technological revolution.
Cadence Design Systems, Inc. (CDNS) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 53 hedge fund portfolios held CDNS at the end of the third quarter which was 64 in the previous quarter. While we acknowledge the risk and potential of CDNS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CDNS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.