Cadence Crushes Earnings — But AI Darling’s Stock Sinks as China Risks Cloud the Design Boom

Cadence Design Systems reported another strong quarter, but the post-print reaction in the stock tells you everything about where we are in AI: perfection is now the baseline, and anything less than “accelerating forever” gets sold.

Why Cadence matters first. Cadence (CDNS) sits in the plumbing of the AI buildout. It doesn’t make GPUs like Nvidia or AI accelerators like Qualcomm. It makes the software and hardware used to design, simulate, verify, and optimize those chips in the first place. Its electronic design automation (EDA) tools automate the layout of tens of billions of transistors on cutting-edge silicon, which is essential for high-performance AI processors and advanced packaging (3D-IC, chiplets, etc.). Alongside Synopsys (SNPS), Cadence is effectively a toll collector on AI compute demand: every hyperscaler, every custom silicon team, every handset OEM trying to build an inference chip has to go through them. That’s why this stock is treated as a leading indicator for AI capex, not just another “software name.”

On the numbers, Q3 was objectively god . Cadence delivered non-GAAP EPS of $1.93, beating consensus ($1.79) by $0.14, and up from $1.64 a year ago. Revenue came in at $1.339 billion, ahead of the $1.32 billion expectation and up about 10% year-over-year. Operating execution was clean: non-GAAP operating margin was 47.6%, above Street models and up from 44.8% last year, signaling that Cadence is not simply growing, it’s scaling. Management also pointed to strong operating cash flow of $311 million, a $2.75 billion cash balance, and $200 million of buybacks in the quarter. Bookings were strong enough to drive backlog to $7.0 billion versus $6.4 billion in Q2. For context, analysts had pegged backlog closer to $6.1 billion, so the delta is meaningful.

Guidance moved higher. Cadence raised its full-year 2025 outlook to ~14% revenue growth and ~18% EPS growth, versus prior guidance of ~13% and ~16%, respectively. New FY25 ranges call for revenue of $5.262-$5.292 billion (vs. consensus ~$5.25B) and non-GAAP EPS of $7.02-$7.08 (vs. consensus ~$6.93). Q4 guidance calls for revenue of $1.405-$1.435 billion and non-GAAP EPS of $1.88-$1.94, with non-GAAP operating margin still in the mid-40s. Management framed this as broad-based: all five lines of business (EDA, IP, hardware, system design/analysis, and services) are running at double-digit growth rates, and they expect that to continue.

The setup they described around AI is still bullish. CEO Anirudh Devgan said the “accelerating AI megatrend is fueling an unprecedented wave of design activity,” pointing to deeper engagements with Samsung, TSMC, and a leading semiconductor customer on next-generation AI and high-performance compute silicon. Cadence also highlighted traction in system and verification hardware and in its IP portfolio, including the recently acquired Arm Artisan foundation IP, which expands its footprint in advanced-node building blocks. Management talked about long-term growth in “physical AI” and system design and analysis: basically the convergence of chip design, packaging, thermal, and mechanical stress modeling for dense AI systems. The message was: AI demand is not a one-product story; it’s bleeding from chips into systems, and Cadence intends to sell into both.

China was a swing factor. Cadence called out that China returned to “business as usual” in Q3 after prior export restrictions choked activity in Q2. Revenue from China was up more than 50% sequentially. That helped backlog jump to $7B. It also helps explain why services revenue grew ~14% y/y and why overall growth stayed double-digit despite a slower macro. But that recovery has a catch. Management acknowledged that some of the strength may reflect Chinese customers pulling forward orders to get ahead of potential new U.S. export controls on advanced design software. Investors have seen this movie: in May, both Cadence and Synopsys disclosed the Commerce Department was moving to require licenses for certain China sales, then that loosened in July, then in October the White House again talked about tightening software exports. The geopolitical pendulum is still swinging. Cadence explicitly said its outlook assumes export rules remain “substantially similar” through year-end. That’s lawyer-speak for “if Washington tightens again, these numbers can move.”

That’s one reason the stock traded lower in the aftermarket even with the beat-and-raise. Another is valuation. Coming into the print, Cadence was still trading at roughly 45x forward earnings, up ~119% since the end of 2022, and still being treated as a pure-play AI beneficiary. The Street is now wrestling with the idea that growth, while still strong, is decelerating at the margin. Revenue grew ~22% in the first half of 2025 as AI design activity went vertical; in Q3 that slipped to ~10%, and the implied glide path into Q4 and FY25 (14% top-line, 18% EPS) looks more “high quality compounding” than “hypergrowth.” In other words, the story just went from “this is the arms dealer for an AI land grab” to “this is a durable double-digit compounder with export risk.” The former gets 50x earnings. The latter maybe doesn’t.

There’s also some nuance in mix. Hardware and system design (simulation, packaging, thermal/stress analysis) are performing well, and management expects these to be long-term pillars, especially around chiplets and 3D-IC for AI compute. But hardware is lumpier than recurring software, which introduces volatility. The company is telling you they can drive operating leverage and keep non-GAAP margins in the mid-40s, but the Street hears “less predictable quarter to quarter.” That shows up as multiple compression.

For other AI-adjacent names, Cadence’s tone is a mild yellow flag, not a red one. Management is still signaling that AI infrastructure build-out is accelerating and that every major customer is leaning in. That’s constructive for hyperscale capex spend and, by extension, for enablers up and down the chain: foundry tools, advanced packaging, high-bandwidth memory, and inference silicon. But the stock’s reaction is a reminder that expectations are now calibrated to uninterrupted acceleration. If Cadence can beat, raise, post 47% non-GAAP operating margin, print a record $7B backlog, and still trade down because growth might “slow” into the teens and China could wobble, then hyperscalers, GPU vendors, and AI platform software names aren’t going to get a pass on any hint of moderation either.

Finally, Synopsys sits in the same geopolitical blast radius. SNPS competes directly in EDA and custom IP, and it’s exposed to the same U.S.–China licensing regime. If investors start to believe that a meaningful portion of current China demand is defensive pull-forward, then both Cadence and Synopsys face a 2026 compare problem. That’s less about Q4 guidance and more about durability: can AI-driven design activity stay structurally elevated without China rushing to lock in tools ahead of each new export headline?

Cadence just put up exactly the kind of quarter you’d want to see if you believe AI is a multiyear build cycle, not a one-year bubble. Revenue beat. EPS beat. Margins expanded. Backlog hit a record. Guidance went up. The caution is in what the stock is telling you: we’re now pricing not just growth, but the permanence of that growth under political risk.