Cadence Design Systems (NASDAQ:CDNS) has seen its stock move sharply lower in recent weeks, with the shares having sold off by 11.6 percent in the past month. The company, which specializes in software products for system design, is still producing positive growth and is still quite profitable. Given the dramatic shift that has occurred in CDNS shares in such a short time, it’s worth asking whether the stock is a buy, a sell or a hold today.
How Is Cadence Performing?
Cadence Design Systems has delivered strong revenue growth over the course of many years, with total revenues rising from $2.7 billion to $4.6 billion between 2020 and 2024 alone. This trend has also been remarkably consistent, as only the company has only reported a single quarter of negative year-over-year revenue growth in the last 10 years.
Net income has also seen fairly positive long-term growth trends. From 2020 to 2024, Cadence’s total net income rose from $591 million to a bit over $1 billion. One area where Cadence’s performance seems to have stalled out is its profitability. Since 2020, the company’s net margins have held largely flat in a range that varies from about 22 to 25 percent. As such, Cadence appears to be largely dependent on rising revenues to bolster its bottom line.
2024 was another fairly good year for Cadence, with revenues up 13.5 percent and adjusted net income per share increasing from $5.15 in 2023 to $5.97. GAAP net income saw a much smaller boost but still rose to $3.85 from $3.82 in the previous year. The company also ended the year with a record backlog of $6.8 billion.
Like many tech companies these days, Cadence is seeing strong growth results from implementing AI in its products. AI optimization helped the company achieve 40 percent year-over-year growth in its System Design and Analysis segment. However, the company performed quite well across the board, even successfully reaching a yearly record in its hardware business.
A brief look at Cadence’s balance sheet shows that the company’s cash stockpile skyrocketed from only about $1 billion at the end of 2023 to over $2.6 billion at the end of 2024. The company’s long-term debt, however, also exploded last year. Cadence ended 2023, with just under $300 million in debt.
By the end of 2024, though, that number had increased to nearly $2.5 billion. While the cash stockpile increases Cadence’s ability to invest in new projects going forward, the amount of debt the company has taken on could make its financial position riskier.
A Look at the Headwinds Facing Cadence
The main cause of the recent selloff in CDNS was the combination of an earnings miss in Q4 and lackluster forward guidance. In 2025, Cadence expects to see revenue and earnings grow by 11.6 percent and 12.2 percent, respectively. These numbers represent a notable downshift from what the company was able to achieve in 2024.
Even more damaging was the fact that Cadence significantly missed Q4 earnings estimates. Analysts had previously expected the company to report EPS of $1.82. When the report came out, however, Cadence delivered quarterly earnings of just $1.49 per share.
Growth over the coming five years is expected to average 14.4 percent. Even with this modest improvement possible beyond 2025, though, it seems likely that Cadence’s earnings growth won’t be sky-high in the foreseeable future. Coming off of the miss in Q4 and with growth guidance for 2025 below what investors were hoping for, it’s little surprise that the stock began retreating.
Is Cadence Overvalued?
In addition to the potential for weakening forward performance, Cadence stock may have a valuation problem. Even after its retreat, the stock is still priced at over 70 times earnings and 16 times sales. At these ratios, the company would likely need to be able to deliver much stronger growth than what is expected from it in the near future.
This view may be somewhat supported by the activity of institutional investors in CDNS over the past six months. In that time, institutional sellers have liquidated about $79.2 billion of Cadence shares. Only about $43.0 billion worth of institutional buying activity occurred over the same period, suggesting that the stock may be losing its appeal to Wall Street investors. Although this doesn’t create an ironclad case for Cadence being overvalued, it may suggest that smart money has started to think of the stock as overpriced given its performance.
It’s worth noting, though, that CDNS stock is still trading well below the price range analysts expect to see it in over the next 12 months. At the time of this writing, Cadence traded at $261.94 and had an average price target of $323.93. If the stock achieves this price target, it will generate a return of almost 20 percent from its current price.
Is Cadence Stock a Buy, Sell or Hold?
Cadence stock is a strong buy according to the consensus of 22 analysts covering the stock who have a $323 price target on it.
One of the first things that stands out as a drawback of Cadence Design Systems is the stock’s rather high valuation. Although analysts still project higher prices for the stock over the next 12 months, it’s hard to ignore the fact that the company trades at very high multiples to its current sales and earnings. With growth likely to slow going into 2025, this high valuation could set CDNS up to stagnate or even correct downward if either the company or the general economic situation slips.
With that said, there’s much to like about Cadence as a business. The company is highly profitable, growing and taking advantage of new technologies to keep itself at the forefront of its industry. Even with revenue growth expected to slow this year, the company is still likely to generate double-digit growth and see its earnings rise significantly.
Unfortunately, the level of growth that Cadence expects to see may not fully justify its high value multiples. Another miss of the kind that happened in Q4 could cause the stock to move further downward, and the outlook for 2025 doesn’t seem particularly optimistic. As such, CDNS may be a better stock to hold than to buy at the moment, though the general strength of the business itself may prevent it from being a sell.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
