Cadence Design: A defensive compounder in the semi space & one of the most profitable software businesses in the world is getting better
The second largest company in one of the most attractive end markets in the world should see accelerated topline and higher margins, boosted by AI
Welcome to the 33rd investment case, 27th resilience and 15th AI & data center on Crack the Market (and the most comprehensive Cadence Design investment case you will find online)! Join me as I dissect one of the very best and most profitable businesses in the world, a way to get exposure to the digitalization of the world and the historical AI buildout without the cyclicality of the semi industry, and a company seeing faster growth for longer and margins trending upwards thanks to the complexification of the industry and AI’s revolutionary role in designing chips.
Due to a lack of slides in Cadence’s investor material, most of the slides below will be from its competitor Synopsys, which has a very similar business and portfolio.
Twice a week, I will release deep dives into stocks and sectors that fit into the three themes that I see winning in this age of tariffs and deglobalization: resilience, sovereignty & reshoring, China. I will then deep dive into the opportunities in the AI data center value chain.
Take advantage of this once in a generation opportunity to build long term wealth by investing in great stocks that will deliver returns for your portfolio for years to come.
You can already read my first 32 deep dives, all of which I see as winners in this new world of tariffs and deglobalization:
ASML (reshoring & China idea): The most innovative company in the world will 2.5x its EPS by 2030.
LKQ (resilience idea): The most defensive business in the auto industry is a tariff winner and could become a compounder.
Atlas Copco (resilience, reshoring & China idea): The best industrials business in the world is on sale, extremely resilient and will benefit from US reshoring.
Badger Meter (resilience idea): The perfect business in the perfect end market, water meters are the definition of resilience.
Knorr Bremse (resilience idea): Who knew making brakes was this lucrative? Rerating with self help story and upside from German infra plan.
Flex (reshoring idea): The electronics manufacturing giant building Nvidia’s servers and enabling reshoring is becoming a better business.
Itron (resilience & reshoring idea): Riding the grid investment super cycle and enabling smart grids.
Roper (resilience idea): A resilient cashflow compounder in the software space with inflecting growth.
RELX (resilience idea): The company to own forever – one of the very best businesses on Earth.
CPKC (resilience & reshoring idea): The rail connecting Canada/US/Mexico and benefiting from reshoring.
Novo Nordisk (resilience idea): The most exciting pharma company in the world is misunderstood and its growth engine is ready to roar back to life.
Kurita (resilience, reshoring & China idea): Water services expert with improving margins and benefiting from reshoring of semiconductor production.
Halma (resilience idea): High quality compounder in safety, health and environmental technologies.
Quanta Services (resilience & reshoring idea): Countercyclical compounder riding a multi decade infrastructure buildout.
Infineon (China idea): Power semiconductor leader with strong structural drivers (AI power and China auto) amidst a cyclical recovery.
Hubbell (resilience & reshoring idea): Pure play on US electrification demand driven by AI and grid investment cycle.
Iberdrola (resilience & reshoring idea): Best integrated utility in the world with a stellar track record and solid growth driven by networks and renewables
Nvidia (AI & data center idea): The backbone of the AI world is unstoppable.
Veolia (resilience & reshoring idea): Resource management giant (water, waste, energy) due for a rerating.
TJX (resilience idea): The retail giant that keeps winning.
DSM-Firmenich (resilience idea): The diversified ingredient powerhouse benefiting from a transformational deal.
Zoetis (resilience idea): Leader in animal healthcare.
Prysmian (reshoring idea): Global cable leader entering a golden age.
Bentley Systems (resilience & reshoring idea): The software compounder bringing infrastructure into the AI age.
Givaudan (resilience idea): The highest quality and most resilient ingredient compounder has a compelling valuation.
First Solar (reshoring idea): The rising Sun in a new electricity supercycle.
Arcadis (resilience & reshoring idea): An engineering and design consultancy giant poised for a rerating.
Thermo Fisher (resilience & reshoring idea): Life Science tools giant just had its clearing event and is a stealth reshoring winner.
Nexans (reshoring idea): Electrification pure play with visibility into 2030.
Croda (resilience idea): A covid darling with a ridiculous valuation is at an inflection point.
Copart (resilience idea): One of the best businesses on Earth is being sold off, should you jump in?
Schneider Electric (resilience & reshoring idea): The Electrification champion that keeps compounding.
After reading this article, you will understand why this company has such a powerful (double digit) and resilient growth engine, what it does, why it is one of the most profitable software businesses (and getting more profitable), why it is so indispensable to arguably the most important sector in the world (semiocnductors) and why it remains one of the best businesses to own for the next decade.
In this article I go through:
Cadence’s business and how it dominates (along with Synopsys) the market for semiconductor design tools.
How the semiconductor value chain is structured, who are Cadence’s clients and why is R&D so key to this sector (highest R&D intensity in the world).
How the company has transformed into a cash generating powerhouse with elite fundamentals, accelerating topline growth and very high incremental margins.
How the company aims to increase its TAM by not just being about the design of the electronics but be used for the whole system/product within many verticals in a rapidly digitalizing world.
How AI is revolutionizing chip design, turbo charging innovation and making EDA tools more critical for the industry.
Why the increasing complexification of the semiconductor industry, as well as the transition to 3D chip architectures will underpin the need for more EDA tools and higher growth for Cadence for years to come.
