Cadence Design Systems (CDNS)
Software / EDA (diseño de semiconductores)
Duopolistic leader in semiconductor design software (EDA), with 80% recurring revenue and a very high switching-cost moat, but trading at a multiple (~75x earnings) that already prices in years of AI-driven accelerated growth — the method finds no margin of safety at this price.
- Price
- $328.63
- Intrinsic value (5y, base)
- $291
- Total annual return (5y)
- -2.4%
- Status (nominal)
- Overvalued
- Margin of safety
- No margin
The essentials
- Wide and stable moat: very high switching costs in Virtuoso (industry standard) plus integration of the three product categories under a single flow.
- 80% recurring revenue and a record contracted backlog of US$8.1 billion, with guided growth of ~19% for FY2026 (raised twice during the year).
- Return on invested capital of ~15.7%, in the "excellent" band against the 10% bar — although invested capital already carries the goodwill from a half-year of intense acquisitions.
- The market price implies a current EV/NOPAT multiple of ~77x, well above the defensible terminal range (20-30x) for the enterprise-software archetype.
Intrinsic value — two valuation methods
By both methods, the value today (DCF $154 · Multiples $234) is below the market price ($329).
Pillars of the analysis
The verdict — today vs 5 years
Today — expensive, no margin of safety: at $329 trades ~40.7% above its value discounted to today (~$234); the expected return does not even reach the risk-free rate (4.5%).
At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.
The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$145.
Thesis
The business
Cadence is a high-quality software business: 80% recurring revenue, return on invested capital of ~15.7% (the "excellent" band against the 10% bar), and a switching-cost moat genuinely hard to replicate in an essentially duopolistic market alongside Synopsys. Growth accelerated in 2026 (guidance raised twice, now ~19% YoY) on demand for AI-assisted design, with all three product categories growing double digits.
The valuation
Valued on EV/NOPAT, the correct metric when stock-based compensation is material (8.8% of revenue, 34% of free cash flow): NOPAT expenses it by construction. The base case projects NOPAT nearly tripling over five years (from ~US$1.24 billion to ~US$2.74 billion) with an exit multiple of 27x — near the top of the 20-30x enterprise-software archetype band — yielding a five-year value that implies a return of -2% — Overvalued.
The margin of safety
Today's market price implies a current EV/NOPAT multiple of ~77x, far above any defensible terminal multiple under the method (cap of 30x for the archetype). The margin of safety today is No margin of safety: the price already discounts a demanding scenario.: even with solid, sustained NOPAT growth, the multiple compression required from the current level toward a reasonable five-year range outweighs the growth effect.
What to watch
The central disconfirmer is whether 2026 growth (~19% guided) is genuinely organic or inflated by the recent acquisition (~US$2.1 billion of cash deployed in the half): if the inorganic portion is stripped out, the method's terminal path should anchor closer to the floor of the band, widening the gap with the current price even further. Also watch the risk of export controls to China, given the company already has a record of a material violation between 2015 and 2021.
Educational / informational. Does not constitute investment advice.