Ricardo Pillai
3 min read
In This Article:
We came across a bullish thesis on Cadence Design Systems, Inc. (CDNS) on Compound & Fire’s Substack. In this article, we will summarize the bulls’ thesis on CDNS. Cadence Design Systems, Inc. (CDNS)'s share was trading at $ 307.2 as of 11th June. CDNS’s trailing and forward P/E were 76.56 and 44.44 respectively according to Yahoo Finance.
A close-up of a LiDAR-on-chip sensor mounted in a consumer-grade electronic device.
In the battle for leadership in the electronic design automation (EDA) market, Cadence Design Systems emerges as the clear winner in Compound & Fire’s Quick Scan, edging out rival Synopsys not just by metrics, but by the narrative of superior quality and shareholder alignment.
Both companies operate in a duopoly, providing critical software and IP for chip design in high-growth areas like AI and automotive. Synopsys performs admirably, with strong financial health, 11.3% revenue CAGR, robust margins, and a solid 19.3% ROIC. However, it narrowly misses the 80% Investment Readiness Score (IRS) threshold, weighed down by elevated stock-based compensation at 11.3% of revenue and tepid insider ownership of 0.6%.
In contrast, Cadence scores an impressive 82%, driven by exceptional capital efficiency—its 28.6% ROIC and 155.7% cash conversion ratio (OCF/Net Income) underscore its ability to turn profits into cash at a rarefied level. With a more reasonable 8.4% in stock-based compensation and a decade-long reduction of 12.3% in share count, Cadence also demonstrates disciplined shareholder value creation.
While both firms carry net cash, Cadence’s consistent outperformance in margin structure, cash flow quality, and capital returns paints a clearer picture of a durable compounder. Despite low insider ownership (0.3%), Cadence’s superior execution across key metrics secures its place on the Compound & Fire shortlist—a notable accomplishment in a tightly contested space. Synopsys, though still a high-quality business, falls just short of inclusion.
For investors seeking enduring quality with proven financial stewardship, Cadence Design Systems makes a compelling case.
Previously, we highlighted a bullish thesis on Synopsys (SNPS), emphasizing its indispensable role in chip design through best-in-class EDA tools and IP, high switching costs, and strong relationships with semiconductor giants like Nvidia and AMD. A contrasting view from Compound & Fire favors Cadence Design Systems (CDNS), not for market position, which it shares in SNPS’s duopoly, but for superior capital efficiency, cash flow quality, and disciplined shareholder returns. While Synopsys excels in innovation and industry depth, Cadence’s exceptional ROIC and shareholder alignment give it the edge for investors prioritizing financial durability in the EDA space.
