Cadence Design Systems is reporting earnings today so I decided to look over their financials and see what they are really worth. You can download my DCF model by clicking here, or don’t, do what you want you have hair on you nuggs.
Business Overview
Cadence Design Systems offers software solutions for development of integrated circuits, printed circuit boards, system on chip, and digital signal processors. These solutions cover all steps from initial chip design and simulation to functional verification. They have also recently acquired NUMECA a Belgium based leader in computational fluid dynamics. CFD is used in the development of automobiles, aerospace, and other things where fluid mechanics are used.
Current Value & Implied Value
Cadence Design Systems is currently trading at $167.71, my model indicates in the best case scenario the stock is worth $142.52. This model accounts for an average 13% increase in revenue YoY for the next 11 years. ( current 3 year average is only 11%). Model also assumes a 3% terminal fcf growth rate.
Business Fundamentals
Revenue:
Cadence Design Systems breaks their revenues into five different streams; Custom integrated circuit design & simulation, Digital integrated circuit design & signoff, Functional verification emulation & prototyping hardware, Intellectual property, and System design & analysis.
Digital integrated circuit design and signoff accounts for the most revenue at 29% respectively, it also has the most consistent growth rate at about 11.8%.
Cost of Sales, Operating Expenses & Operating Margins:
By far the biggest expense incurred by Cadence comes from their investments in research and development. R&D alone accounts for around 1 billion dollars in operating expenses per year, or around 50% of all operating expenses respectively.
Despite this large investment Cadence has had a consistently positive and increasing operating margins of 18%-26% between fiscal 2018-2021
Pros
Product Diversity
Through internal development and acquisitions Cadence has created a suite of software products for every step of chip development. Synergies between products create higher switching costs for customers and allow for higher customer retention.
Customer Base
Cadence strives to acquire customers across various markets including consumer devices, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial, and healthcare.
Cons
Overvalued
Based purely on this DCF it seems as though Cadence is overvalued, this is due to increases in the cost of equity in the market as interest rates rise. I have not done multiples research for comparable companies so I’m not sure how it is valued relative to competitors. I do not recommend making financial decisions based solely on this valuation.