Unveiling Cadence Design Systems (CDNS)'s Value: Is It Really Priced Right? A Comprehensive Guide
Despite a daily gain of 1.84% and an Earnings Per Share (EPS) of 3.26, Cadence Design Systems Inc (NASDAQ:CDNS) has experienced a 3-month loss of -2.85%. The question is, does this make the stock modestly overvalued? Let's delve into the valuation analysis to find out.
Company Introduction
Cadence Design Systems Inc (NASDAQ:CDNS) is a reputable provider of electronic design automation software, intellectual property, and system design and analysis products. The company's EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. With a current stock price of $232.91 and a GF Value of $209.96, is Cadence Design Systems (NASDAQ:CDNS) overpriced? Let's explore further.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line indicates the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, Cadence Design Systems (NASDAQ:CDNS) appears to be modestly overvalued. Given this, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Cadence Design Systems has a cash-to-debt ratio of 1.35, ranking worse than 60.97% of 2721 companies in the Software industry. However, GuruFocus ranks Cadence Design Systems's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk. Cadence Design Systems has been profitable 10 years over the past 10 years. Its operating margin of 28.78% is better than 94.74% of 2756 companies in the Software industry. GuruFocus ranks Cadence Design Systems's profitability as strong.
The average annual revenue growth of Cadence Design Systems is 15.9%, ranking better than 67.39% of 2398 companies in the Software industry. The 3-year average EBITDA growth is 25.5%, which ranks better than 74.08% of 1987 companies in the Software industry.
ROIC vs WACC
Comparing the return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to evaluate a company's profitability. Cadence Design Systems's ROIC was 22.35, while its WACC came in at 10.89, indicating that the company is creating value for shareholders.
Conclusion
In conclusion, the stock of Cadence Design Systems (NASDAQ:CDNS) shows every sign of being modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 74.08% of 1987 companies in the Software industry. To learn more about Cadence Design Systems stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
