QS Research · Michael Burry's Scion Capital analyst template · 2006
CADENCE DESIGN SYSTEMS INC (CDNS)
As of 2026-11-11 · 12/15 boxes filled from SEC filings and market data
Report price $331.64 (close 2026-11-10)
Conclusion: PASS
Conviction low · base case +4% · downside -32% · upside +14%
Cadence is a genuine intangible-asset franchise - revenue compounded from $2.68B (FY2021) to $6.13B TTM, ROIC 16.4% against an 11.0% WACC, $1.76B TTM FCF and an $8.2B backlog - but the price still carries a premium: 65.9x TTM P/E, 42.6x EV/GAAP EBITDA (TTM), 52.2x EV/FCF and a 1.9% FCF yield, versus profitable peers at 24.0x-36.6x EV/EBITDA and a peer-median P/E of 39.4x. The company's 2026-10-26 guidance is $6.387-$6.417B revenue and $8.37-$8.43 non-GAAP EPS. On the code's GAAP P/E cases: the base case is P/E at 39.4x, the peer median P/E (5 peers in the comps table), giving $346.47 (+4.5%); the downside uses 43.0x - halfway from today's 65.9x to the 20x market anchor and at least 15% below today's - plus the $0.01 a share exposure stress, giving $224.49 (-32.3%); the upside is $379.06 (+14.3%). The market is missing that the margin is compressing (Q3 GAAP operating margin 26.2% vs 31.8%, non-GAAP 44.1% vs 47.6%, opex +30% vs revenue +22%) and that GAAP EPS was flat at $1.05 while the beat came from non-GAAP add-backs; with base +4.5%, downside -32.3% and upside +14.3%, reward/risk is 0.44 and the call is pass with low conviction, because the premium multiple has a dated catalyst (the 2026-10-26 guidance and margin disclosure) to compress against. No cycle average is used: this is a secular business valued on post-deal TTM and the P/E cases, and the $2.14B of acquisitions to 2026-09-30 mean pre-deal years are a smaller company and are excluded.
Key numbers
- Share price: $331.64
- Market cap: $91.00B
- Latest financial period: TTM to Sep 30, 2026
- Revenue (TTM): $6.13B
- EV / EBITDA (TTM): 42.6x
- P/E (TTM): 65.9x
- FCF yield: 1.9%
- Price / book: 13.24x
- Earnings-quality flags (TTM): none flagged
- EV / FCF (TTM): 52.2x
- Revenue growth (latest fiscal year): +14.1%
- ROIC (TTM): 16.4%
- WACC: 11.0%
- Economic profit spread: +5.4 pts
The 15 boxes
- ✓ 1. Long-form business notes
Cadence is a licensing business: FY2025 revenue of $5,297M was 91% product and maintenance ($4,822M) and 9% services ($475M), sold mainly as two-to-three-year time-based software licenses, with emulation hardware sold, leased or consumed via Cadence-managed cloud and IP licensed for fees plus royalties. Scale has roughly doubled since the FY2021 10-K ($2.68B revenue, $645.6M operating income) to $5.30B and $1.49B in FY2025 and $6.13B and $1.77B on a TTM basis to 2026-09-30, with contracted but unsatisfied performance obligations of $7.8B at 2025-12-31. The business has changed through FY2025 acquisitions (Arm Artisan foundation IP, Secure-IC, VLAB Works, agentic AI verification technology) that lifted intangible amortization to $99.9M TTM from $39.9M in FY2025, a pending Hexagon D&E/MSC acquisition, and an AI-centric reframing of the Intelligent System Design strategy into three pillars versus the three layers described in the FY2021 report.
- ✓ 2. Competitive advantage
Cadence looks like a durable, intangible-asset franchise rather than a cost leader: revenue rose every year from $2.68B in FY2021 to $5.30B in FY2025 and $6.13B TTM to Sep 2026, with operating income going from $645.6M to $1.49B to $1.77B, and the model is asset-light ($204.3M TTM capex against $1.97B TTM operating cash flow). The moat rests on time-based software licenses and an installed base that re-licenses, plus foundry/IP ecosystem ties and engineering talent (~13,800 employees at 2025-12-31, mostly engineers). It is not unopposed: the 10-K names Synopsys (with Ansys), Siemens EDA, Keysight, Zuken and several Chinese EDA entrants, and the company itself warns that sole-source competition could push operating margins down. Export controls on China sales are the clearest external constraint on the franchise.
- ✓ 3. 10-Q takeaways
Q3 2026 revenue rose 22% to $1.633B and nine-month revenue rose 22% to $4.692B, but GAAP operating margin fell to 26.2% from 31.8% while non-GAAP margin fell to 44.1% from 47.6%. FY2026 guidance was raised to revenue of $6.387-$6.417B and non-GAAP EPS of $8.37-$8.43, with record $8.2B backlog. Cash was $1.452B at Sep 30, 2026 after $400M of Q3 buybacks; the 10-Q risk-factor update flags geopolitics and trade controls.
- ✓ 4. Corporate governance
Filled; members read this box.
- ✓ 5. Overview of the prior 3 years of 8-K filings
Filled; members read this box.
- ✓ 6. Other significant filings
Filled; members read this box.
- ✓ 7. Chronology of significant news and events
Filled; members read this box.
- ✓ 8. Comparables valuation interpretation
Filled; members read this box.
- ✓ 9. Insider trading interpretation
Filled; members read this box.
- ○ 10. Earnings-call notes
- ○ 11. Impression of the shareholder letter
- ○ 12. Scuttlebutt overview
- ✓ 13. Valuation and risk/reward summary
Filled; members read this box.
- ✓ 14. Current price suppression and potential catalysts
Filled; members read this box.
- ✓ 15. Conclusions
The call above.
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