Cadence Design Systems (CDNS)

By both methods, the value today (DCF $154 · Multiples $234) is below the market price ($334).

Today — expensive, no margin of safety: at $334 trades ~43.1% 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.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($334) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (33.8%/year) above our base case (14.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$4.6 bn of owner earnings in year 5 (vs ~$2.1 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on NOPAT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM to 30-Jun-2026, re-based from levels using the 8-K (Item 2.02) of 27-Jul-2026, which reported the quarter and the half before XBRL had ingested it: TTM = FY2025 + cumulative H1-2026 − cumulative H1-2025 (§0, the cumulative-column convention). TTM revenue calculated that way: US$5.838bn (versus FY2025 US$5.297bn). TTM EBIT was further normalized: the comparison half (H1-2025) carries a charge of US$128.5 million from the DOJ/BIS settlement over export control violations (2015-2021), already resolved and paid in Jul-2025; without removing it, the level subtraction artificially inflates the TTM operating margin to ~30.3%. Normalized (adding that charge back to the H1-2025 base), TTM EBIT is US$1.642bn and the margin 28.1% — consistent with the GAAP margin of FY2025 (28.2%) and with FY2026 guidance (~28.25% at the midpoint). The valuation metric is NOPAT (EV/NOPAT) because stock-based compensation is material (8.8% of revenue, 34% of FCF): NOPAT expenses it by construction, unlike an adjusted FCF/EBITDA. Invested capital (equity + debt − cash, from the 8-K balance sheet at 30-Jun-2026) gives a ROIC of ~15.7%, in the «excellent» band against the 10% bar. In the half, ~US$2.1bn of cash was deployed in acquisitions (goodwill rose from US$2.75bn to US$4.91bn), which raises D&A (amortization of acquired intangibles) and accounts for part of the margin jump — it is declared as a source of noise in the path. The growth path starts from current FY2026 guidance (~19% YoY, raised twice in the year) and decays geometrically toward a terminal rate of ~10.5%, consistent with a highly recurring enterprise software business (80% of revenue) that is nonetheless mature in its core category (Core EDA). ΔNWC and interest were derived by accounting identity from the condensed statements in the 8-K (OCF = net income + D&A + SBC + other non-cash − ΔNWC), with the full FY2025 year assuming additional non-cash items ≈0 for lack of a quarterly breakdown — the approximation is declared. There is no material net buyback in the TTM window (the diluted count rose slightly, from 273.3M to 276.2M, as SBC and M&A-linked issuance exceeded buybacks) → `accumulateCash` is used with the real retention cascade (LTM FCF US$1.679bn, LTM buybacks US$0.800bn, dividend US$0 → retention ~52%), with no `sharesPath`.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $291 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $334, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $291 in 5 years and a required return of 4.5% annually, the maximum to pay today is $234. Against the current market price ($334), the margin of safety is -43.1% (trades above the maximum → a premium is paid) and the total return at that price would be -2.7% annually.

• Current entry multiple. Current EV/NOPAT of 75×, well above the enterprise-software archetype band (20-30x).
• Base-case exit multiple. 27x EV/NOPAT on year-5 NOPAT, near the top of the band given the business's quality (wide moat, ROIC ~15.7%).
• Expected 5-year return. The base scenario yields a return of -3% at market price — Overvalued.
• Margin of safety today. No margin of safety: the price already discounts a demanding scenario..
• Sensitivity to the multiple. Given how far the entry multiple sits above the terminal multiple, the return depends almost entirely on how much and how fast the multiple compresses — the business's growth, though solid, is not enough to offset it.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (87%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on invested capital. ~15.7% on the balance sheet's real invested capital (equity + debt − cash), in the "excellent" band against the 10% bar.
• Cash generation. TTM free cash flow of ~US$1.68 billion on revenue of US$5.84 billion (~29% conversion).
• Stock-based compensation. 8.8% of revenue and 34% of free cash flow — material; the valuation metric (NOPAT) expenses it by construction.
• Serial acquirer. This quarter's invested capital already carries ~US$2.1 billion of goodwill and intangibles just acquired; reported ROIC does not yet reflect the full return on that capital.
• Leverage. Long-term debt of US$2.48 billion against equity of US$6.86 billion — low for a software business.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Cadence reports revenue by product category (Core EDA, Semiconductor IP, System Design and Analysis), not by financial segment with operating profit broken out — EBIT is only reported on a consolidated basis. The highest-signal driver is contracted backlog, which reached a record US$8.1 billion in the second quarter of 2026, with US$4.2 billion expected to be recognized as revenue in the next twelve months: it is evidence that guided growth (~19% for FY2026) is already mostly contracted, not extrapolated. Stock-based compensation and headcount are included because their recent trajectory is distorted by the acquisitions in the first half of 2026 (~US$2.1 billion of cash deployed), which also raised amortization of acquired intangibles well above its historical level.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Guided FY2026 growth. ~19% YoY at the midpoint, raised twice during the year from an initial range of 16-18%.
• Growth by category. Semiconductor IP (+40%) and System Design and Analysis (+37%) grow well above Core EDA (+18%) year over year.
• Backlog as a leading indicator. Record backlog of US$8.1 billion, with US$4.2 billion expected to be recognized in the next twelve months.
• Inorganic component of growth. Part of the 2026 acceleration coincides with ~US$2.1 billion of acquisitions deployed in the half; the purely organic portion is not broken out in the available extraction.
• Expected deceleration by year 5. The base case models a geometric deceleration from ~19% toward ~10.5% terminal, consistent with the maturity of the Core EDA core segment.

• Revenue recurrence. 80% of revenue is recurring (2-3 year license contracts), with a record contracted backlog of US$8.1 billion.
• Product differentiation. Virtuoso is described as the industry standard; this is not a commodity business.
• Market structure. Essentially a duopolistic market alongside Synopsys, with Siemens EDA as a relevant third player.
• Geopolitical exposure. 15% of revenue comes from China, with a record of a US$140.6 million settlement for export control violations (2015-2021).
• Demand cyclicality. Growth depends on semiconductor customers continuing to start new design projects; the semiconductor industry is cyclical.
• Pace of acquisitions. Active and recent acquisitions (BETA CAE, Arm Artisan, Secure-IC, VLAB Works, Hexagon D&E) expand the product perimeter but raise integration risk.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.5x
• ✓Interest coverage (EBIT / interest)13.1x
• ✓Liquidity (current ratio)1.74×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 87% of ROIC
• ✓Value creation (ROIC − 10% bar)+6pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.5x — no over-investment
• !Float / working capitalConsumes cash $0.4 bn (positive WC)
• ✕Dilution (SBC % of revenue + shares)SBC 8.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Liquidity. Current assets of US$3.22 billion against current liabilities of US$1.85 billion as of Jun-30-2026.
• Leverage. Long-term debt of US$2.48 billion, stable over the last year, against equity of US$6.86 billion.
• Cash after acquisitions. Cash fell from US$3.0 billion to US$1.44 billion in the half from the ~US$2.1 billion spent on acquisitions, funded with own cash without issuing additional net debt.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Anirudh Devgan has led since December 2021 after thirteen years at the company in engineering and R&D roles; prior experience at Magma Design Automation, another EDA company.
• Capital allocation. Buybacks guided to ~50% of free cash flow, combined with active bolt-on acquisitions; no dividend.
• Results transparency. Beat revenue, non-GAAP operating margin, and earnings-per-share guidance in the second quarter of 2026, and raised full-year guidance twice.
• Known institutional ownership. BlackRock (7.93%) and Vanguard (9.86%) are the largest holders identified in the proxy; the rest of the float is not broken out by individual holder in the available extraction.

• There is no identifiable missing-buyers discount source: analyst coverage is broad and the company is a well-known S&P 500 constituent.
• There are no evident motivated sellers either: there is no accounting one-off hiding the real business, nor an over-punished recovery — the price reflects results that beat guidance and guidance that was raised twice this year.
• The market today is paying a multiple that already prices in years of growth accelerated by AI-assisted design demand, plus optimism over the integration of recent acquisitions.
• Contracted backlog (US$8.1 billion) and 80% recurring revenue genuinely reduce execution risk — but that is already in the price, not a discrepancy between perception and reality.

Without a clear source of missing buyers or motivated sellers, the correct reading is that Cadence is not cheap: it trades at a multiple (~75× after-tax operating income) that only holds up if today's growth persists far beyond what this method's discipline recognizes in a 20-30x terminal multiple. The business is of genuine quality (wide moat, high recurrence, solid return on capital), but quality is not the same as a cheap price: it is exactly the case the method flags as "apparent" — an excellent business paid for in advance.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -13%/year (-52% total): the margin of safety protects the downside. The bull (+1%/year, +7% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Export controls to China. 15% of quarterly revenue comes from China; record of a US$140.6 million settlement with the DOJ/BIS for export control violations (2015-2021), with a three-year probation currently in effect.
• Non-linear hardware/IP recognition. A substantial portion of hardware and IP revenue is recognized at delivery, not over the life of the contract, making quarterly results more volatile.
• Semiconductor cyclicality. Growth depends on semiconductor customers continuing to start new design projects; the industry has suffered significant downturns tied to the maturity of product cycles.
• Acquisition integration risk. The growth strategy partly depends on continued acquisitions; the filing warns that integration may prove difficult and dilute shareholder value.
• Evolving AI regulation. The AI regulatory framework (EU AI Act, state-level regulation in California) is under active development; the company acknowledges reputational and legal risk from governance of its AI use in products.
• Elevated entry multiple. The market price implies an EV/NOPAT of 75×, leaving little room for error if growth decelerates sooner than modeled.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 16% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 14% at a multiple/growth of 5.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 2% (EBIT/EV) + ROIC 16% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 34% vs our 14%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -13%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 34% growth, far above our 14% — heroic assumptions.