Cadence: Long Term Outlook Still Strong Despite Double-Digit Drop

Key Points

• Cadence Design Systems has had a rough start to 2025, with shares down by a double-digit percentage.
• Despite the drop in share price, Wall Street analysts haven't substantially changed price targets, on average.
• The company's prospects remain strong even after a rough post-earnings price reaction.

As of the Feb. 20 close, shares of semiconductor staple Cadence Design Systems NASDAQ: CDNS have fallen significantly in 2025. The stock’s 10% drop is largely due to its Q4 earnings release that revealed disappointing guidance for 2025. Still, the company remains a bedrock piece of one of the most important parts of the market and economy: advanced chips.

In my opinion, this makes it a strong play going forward despite the drop. The company sees hundreds of billions in industry growth that it can benefit from and is expected to just come from data centers.

Cadence Design Systems: Company Beats Q4 Estimates, But Guidance Disappoints

Cadence makes key software that is essential to driving innovation in the semiconductor industry. Its electronic design automation software (EDA) is highly advanced, and designing next-generation chips is essentially impossible without it. It dominates that market along with Synopsys NASDAQ: SNPS.

Cadence reported Q4 results that beat expectations. Its revenue of $1.36 billion increased by 27% and was slightly higher than estimates. Adjusted earnings per share (EPS) of $1.88 increased 36% and was $0.06 higher than what Wall Street was looking for. However, earnings and revenue guidance were missed for the full year 2025, leading to the stock’s fall.

The company’s midpoint adjusted EPS figure of $6.70 was $0.10 below Wall Street, and revenue of $5.18 billion was missed by $50 million. 

Notably, the company closed out the year with a record backlog of $6.8 billion. It also had record current remaining performance obligations (cRPO). The backlog grew by 13%, which is the same rate as the full-year 2024 revenue, showing that the company’s ability to maintain similar growth rates is strong. However, it is forecasting slightly lower growth of 11.5% in 2025.

Partnerships With NVIDIA, Qualcomm, and Chinese EV Makers Strengthen

Cadence has kept its China revenues steady at about 13% throughout the year. Due to trade restrictions on EDA software sales to China for advanced AI chips, the company needed other industries to boost sales in the country.

Cadence has done very well with Chinese electric vehicle companies. “Almost all” of them are now designing chips, according to Cadence. 

One reason I like Cadence is that its technology matters in all parts of the semiconductor industry, not just data centers. Its software is important for making big strides in the automotive, industrial, and consumer segments.

Cadence demonstrates this industry-wide importance through its deepening relationships with NVIDIA NASDAQ: NVDA, Qualcomm NASDAQ: QCOM, and Chinese EV makers. Aside from AI infrastructure, the rest of the chip market has remained subdued for some time.

Another interesting metric to look at when it comes to Cadence is the Rule of 40. This rule states that software companies experiencing healthy growth should have the sum of their revenue growth and operating profit margin above 40%. Cadence has been significantly above this threshold going back to at least 2019.

The management team noted that 2025 will be the first year that the sum of its revenue growth guidance and adjusted operating margin guidance is above 55%. This signals that despite growth expected to be down slightly, estimates of profitable growth are as optimistic as ever.

Looking toward the long-term future, the company expects to participate strongly in what it sees as the next phase of the AI revolution, physical AI. This involves implementing AI systems into physical devices like cars, robots, and drones. In cars, Cadence sees the value of chips in vehicles increasing by 5 to 10 times. This would result in auto chip growth of $200 billion to $400 billion, similar to the growth predicted in the data center opportunity.

Wall Street Analysts Split on Cadence—Mixed Price Target Revisions

Despite the fall in shares, Wall Street analysts were not at all in agreement regarding which direction they should change their ratings. MarketBeat tracked six analyst price targets that were updated after the release. Three analysts lowered their price targets, two raised, and one reiterated. 

Overall, the average change in their price targets was 0%. Additionally, the new price targets from these analysts signal a 22% upside in shares compared to Cadence’s Feb. 20 closing price. 

Cadence's business experienced healthy growth in 2024 and expects this to continue in 2025. However, shares of this company really haven’t benefited much recently. 

I’m optimistic about Cadence's long-term prospects. I believe it will thrive in the coming years as technology advances. This dip in Cadence shares provides an attractive opportunity to take advantage of this long-term growth.