CDNS

Cadence is one of the highest-quality businesses in software: a mission-critical EDA franchise whose tools sit at the heart of every chip design, with the MD&A describing 'industry-leading computational AI-driven software, accelerated hardware, and IP.' The fundamentals confirm the quality. Revenue rose 14.1% to $5.30B, extending a clean five-year climb ($2.68B→$5.30B), operating margin is a fat 28.2%, ROE is 20.3%, and operating cash flow jumped 37.1% to $1.73B against just $142M of capex — prodigious free-cash conversion. The balance sheet is a fortress: $3.00B cash, $5.47B equity, current assets ($4.67B) covering current liabilities ($1.64B) nearly 3x. Management is returning that cash, with buybacks up 68% to $925M. This is a durable compounder.

The problem is the price and a subtle quality wrinkle beneath the headline growth. At $387.39 the stock trades at 95.4x trailing diluted EPS and 19.9x sales — a multiple that prices in years of flawless execution. Yet net income grew only 5.1% and diluted EPS only 5.5%, far behind the 14.1% revenue line. That gap is the tell: the MD&A shows FY2025 top line was boosted by acquisitions (VLAB Works, Arm's Artisan foundation IP, Secure-IC, on top of FY2024's BETA CAE), and the associated cost of revenue and amortization (D&A +15.7%) are diluting profit flow-through. So you are paying ~95x for earnings that are currently compounding in the mid-single digits — a poor growth-adjusted bargain even for a premier asset.