Cadence Design Systems: A Semiconductor Stock That's Been on a Roll

Alright, tech investors, let's talk about a stock that's been on a tear for the past five years: Cadence Design Systems (NASDAQ: CDNS). This company has been churning out a compound annual growth rate (CAGR) of 32% over the last half-decade, and it's not showing any signs of slowing down. So, what's the secret sauce behind Cadence's impressive performance? Let's dive in and find out.

First things first, Cadence Design Systems is a powerhouse in the electronic systems design space. The company's modeling and computational software are essential cogs in the lifecycle of semiconductors and other vital technologies. As the complexity of semiconductors needed for AI, hyperscale computing, and beyond continues to grow, Cadence has become an invaluable partner for many chip companies, solidifying its position as a vital part of the semiconductor ecosystem.

Now, you might be thinking, "That's all well and good, but what about the stock itself?" Well, let me tell you, Cadence Design Systems has been a standout tech stock of the last 15 years, soaring 5,000% to blow away the Tech Sector's 640% run. And while the stock has been flat over the past 12 months, lagging Tech's 25% run, it's still trading 10% below its highs and looks ready to break out of its trading range.

So, what's the bull case for this tech and AI stock? Well, Cadence Design Systems is one of the giants of electronic systems design, and its Intelligent System Design strategy aims to "deliver software, hardware and IP that turn design concepts into reality." The company's portfolio plays a critical role in cutting-edge tech, including semiconductors and artificial intelligence, making it an essential partner for many chip companies and a vital part of the semiconductor ecosystem.

Wall Street has flocked to Cadence Design Systems because its modeling and computational software are essential cogs in the lifecycle of semiconductors and other vital technologies. As CEO Anirudh Devgan noted in his Q3 remarks, "Customers are achieving outstanding results with Cadence.AI, and I’m excited by its accelerating proliferation as AI rapidly becomes an integral part of the design workflow."

Cadence Design Systems is an AI and a picks-and-shovels tech stock that averaged 14% revenue growth in the trailing five years. The company is projected to follow this impressive and consistent sales growth up with 13% revenue expansion in 2024 and 2025, climbing from $4 billion in FY23 to $5.23 billion in FY25. Cadence's 2025 and 2026 earnings estimates slowly faded over the last 12 months, but the company is still projected to grow its adjusted earnings by 15% in FY24 and 16% in FY25, following 20% YoY growth in FY23.

Now, you might be wondering, "What about the valuation? Is Cadence Design Systems a bit too pricey for my taste?" Well, while the stock is trading at 52X forward earnings compared to Tech's 26.8X, Wall Street has been willing to pay a premium for Cadence's consistent growth outlook, and investors have been rewarded for doing so. Cadence trades near its 10-year median and at almost a 30% discount to its highs. When you factor in its long-term earnings growth outlook, Cadence trades at a 43% discount to its highs, with a 3.4 PEG ratio.

So, there you have it, tech investors. Cadence Design Systems has been on a roll for the past five years, and there's no sign of it slowing down anytime soon. With its essential role in the semiconductor ecosystem, strong financial performance, and growing demand for its services, Cadence is a stock worth keeping an eye on. As always, do your own research and make sure this stock aligns with your investment goals and risk tolerance. Happy investing!