2024-03-27 00:47:37 ET
Summary
- Cadence Design Systems is one of the market leaders in electronic design automation software for chips, ICs, and PCBs.
- The company benefits from strong secular tailwinds and high barriers to entry in the EDA market.
- Cadence has strong pricing power due to high switching costs and generates significant recurring revenue.
- While its valuation metrics are a little off the chart, the stock has been very dependable, and AI is producing new tailwinds.
Cadence Design Systems ( CDNS ) is a leader in the EDA (electronic design automation) software, which is used to design chips, ICs and PCBs (printed circuit boards).
If you can stomach its high valuation, and predicated on valuation multiples staying at present levels, we still see multiple reasons to be positive on the stock:
- Given the complexity of the solutions, which are developed over decades, the EDA market has very high barriers to entry.
- There are very high switching costs for customers, inferring pricing power to the companies and producing very little attrition.
- There are strong secular tailwinds, chips go into ever more stuff and the complexity of chips is increasing exponentially.
- AI-driven design tools are opening a new accelerator, producing efficiency gains and these will likely increase customer spend.
- 85%+ of company revenues are high-margin recurring revenues
- The company produces considerable operating leverage; hence, earnings and cash flow are likely to grow faster than revenues.
- The company has an iron-clad balance sheet and can afford to spend half its free cash flow on share buybacks.
- The company has been regular and dependable as clockwork with revenue and earnings forecasts.
Read the full article on Seeking Alpha
For further details see:
AI Is Going To Give Cadence Design Systems A Boost