Cadence Design Systems trades at $347.62 per share and has stayed right on track with the overall market, gaining 13.3% over the last six months. At the same time, the S&P 500 has returned 11.6%.
Is now the time to buy CDNS? Find out in our full research report, it’s free.
Why Does CDNS Stock Spark Debate?
Powering the chips behind everything from smartphones to AI accelerators for over 35 years, Cadence Design Systems (NASDAQ: CDNS) provides essential computational software, hardware, and intellectual property used by engineers to design and verify advanced electronic systems and semiconductors.
Two Things to Like:
1. Elite Gross Margin Powers Best-In-Class Business Model
Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Cadence Design Systems’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 87.1% gross margin over the last year. Said differently, roughly $87.11 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Cadence Design Systems has seen gross margins decline by 2.2 percentage points over the last 2 year, which is among the worst in the software space.
2. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Cadence Design Systems is extremely efficient at acquiring new customers, and its CAC payback period checked in at 15 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Cadence Design Systems more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.
One Reason to be Careful:
Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Cadence Design Systems grew its sales at a 14.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Cadence Design Systems.
Final Judgment
Cadence Design Systems’s merits more than compensate for its flaws, but at $347.62 per share (or 14.9× forward price-to-sales), is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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