Morningstar Report-636d1777e26a17cb57991344

Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:51, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 22
Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC
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Last Price Fair Value Estimate Price/FVE Market Cap Economic Moat Moat Trend Uncertainty Capital Allocation ESG Risk Rating Assessment1
234.52 USD 161.00 USD 1.46 63.94 USD Bil Narrow Stable High Exemplary ;;;;;
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 25 Oct 2022 03:42, UTC
Price vs. Fair Value
Last Close: 234.52

200 Fair Value: 161.00
25 Oct 2022 03:42, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
— 1.45 1.95 1.63 1.00 1.46 Price/Fair Value
3.97 59.52 96.70 36.59 -13.80 45.99 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 25 Oct 2022 03:42, UTC.
Contents
Business Description Cadence Is Poised for Solid Growth Thanks to Broad-Based
Business Strategy & Outlook (15 Feb 2023)
Bulls Say / Bears Say (25 May 2023) EDA Demand
Economic Moat (15 Feb 2023)
Fair Value and Profit Drivers (15 Feb 2023)
Business Strategy & Outlook Brian Colello, CPA, Sector Director, 15 Feb 2023
Risk and Uncertainty (15 Feb 2023)
Cadence provides electronic design automation, or EDA, software, intellectual property, and system
Capital Allocation (15 Feb 2023)
Analyst Notes Archive design and analysis products that are critical to the semiconductor chip design process. As secular
Financials trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing,
Appendix among others, accelerate, we expect that Cadence will benefit from both the rising complexity of chip
Research Methodology for Valuing Companies designs and the advancing digitalization of various end markets. We believe narrow-moat Cadence has
Important Disclosure a long growth runway as it uses strategic organic and inorganic investments to expand its platform
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and amid a growing semiconductor landscape.
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures.
We believe Cadence’s products are transformational in enabling increasingly complex integrated circuit
The primary analyst covering this company does not own its stock.
and system-on-chip design. Advancing technologies require these more powerful, precise, and efficient
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating.
chips, for which EDA software informs the end-to-end process. Cadence is the second-largest EDA
vendor, behind Synopsys. It has multidecade-spanning market dominance in analog design and is
emerging as a solid competitor in digital design. While we expect Cadence to grow at a slightly more
muted pace than Synopsys, we view the firm’s analog stability, focus on profitability, and building of a
holistic offering that includes specialized system-level solutions as creating a compelling, risk-mitigated
narrative.
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Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:51, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 22
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Sector Industry Outside of core EDA, we view Cadence’s IP and systems businesses as benefiting from industry trends
a Technology Software - Application
as well. As systems companies increasingly design their own differentiated silicon in-house, we expect
Business Description Cadence to benefit from a customer base expanding beyond traditional semiconductor designers as well
Cadence Design Systems is a provider of electronic
as from an increasing reliance on IP. Further, the system business’ system-level analysis becomes
design automation software, intellectual property, and
critical as designs trend from chip-level to board-level and multidie integrated systems become the
system design and analysis products. EDA software
automates the chip design process, enhancing design standard for supporting advanced technologies.
accuracy, productivity, and complexity in a full-flow end-
to-end solution. Cadence offers a portfolio of design IP,
Reflecting the mission-critical nature of EDA tools, Cadence exhibits negligible churn, with customer
as well as system design and analysis products, which retention consistently at approximately 100%, and has relationships with all major chip design
enable system-level analysis and verification solutions. companies in the United States.
Cadence’s comprehensive portfolio is benefiting from a
mutual convergence of semiconductor companies Bulls Say Brian Colello, CPA, Sector Director, 25 May 2023
moving up-stack toward systems-like companies, and
u Secular tailwinds in chip design such as 5G, Inernet of Things, AI/ML, and others should increase
systems companies moving down-stack toward in-house
demand for EDA tools and support growth for Cadence.
semiconductor design. The resulting expansion in EDA
u The growing system design and analysis business enables a larger TAM for Cadence and serves an
customers, alongside secular digitalization of various end
markets, benefits EDA vendors like Cadence. expanding system-level design market as SoCs and advanced packaging become more important.
u Cadence is the market leader in analog EDA tools, holding over 80% of the market share for more than
two decades, which we believe adds incremental stickiness to the firm’s overall EDA portfolio.
Bears Say Brian Colello, CPA, Sector Director, 25 May 2023

u Interoperability of EDA tools poses a risk that influential customers could switch to a different vendor
with relative ease, which could have an impact on long-term growth.

u As Cadence increases its system design and analysis business, the firm enters a new and highly
competitive system analysis market, competing with incumbents like Ansys.

u Geopolitical tensions with China and a growing EDA tools industry in the country could have an impact
on Cadence’s ability to do business in the region and have an impact on China market share.
Economic Moat Brian Colello, CPA, Sector Director, 15 Feb 2023

We assign Cadence Design Systems a narrow moat due to switching costs and intangible assets
associated with the firm's platform offerings. Cadence provides electronic design automation software
and intellectual property blocks that are transformational in enabling efficient, accurate, and
increasingly complex semiconductor chip design, as well as system design and analysis tools, which
enable system-level design and verification. We expect that as secular trends toward artificial
intelligence, 5G communications, and cloud computing, among others, accelerate, Cadence will benefit
from both the rising complexity of chip designs and the advancing digitalization of various end markets.
We believe the company benefits from high customer switching costs in both its EDA and system design
and analysis segments, as well as intangible assets associated with its IP offerings. In our opinion, this
customer stickiness and proprietary IP portfolio will drive excess returns on capital for Cadence over the
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Competitors
Cadence Design Systems Inc CDNS Ansys Inc ANSS Synopsys Inc SNPS Siemens AG SIE
Last Close
234.52 Last Close Fair Value
Last Close
330.27 160.00
435.41
Uncertainty : Medium
Fair Value Fair Value Fair Value Last Close
161.00 262.00 382.00 152.54
Uncertainty : High Uncertainty : Medium Uncertainty : High
Economic Moat Narrow Wide Narrow Narrow

Moat Trend Stable Stable Stable Stable
Currency USD USD USD EUR
Fair Value 161.00 25 Oct 2022 03:42, UTC 262.00 23 Feb 2023 20:31, UTC 382.00 1 Dec 2022 06:37, UTC 160.00 10 Feb 2023 16:56, UTC
1-Star Price 249.55 353.70 592.10 216.00
5-Star Price 96.60 183.40 229.20 112.00
Assessment Over Valued 30 Jun 2023 Over Valued 30 Jun 2023 Fairly Valued 30 Jun 2023 Fairly Valued 30 Jun 2023
Morningstar Rating QQ30 Jun 2023 21:16, UTC QQ30 Jun 2023 21:16, UTC QQQ30 Jun 2023 21:16, UTC QQQ30 Jun 2023 23:47, UTC
Analyst Brian Colello, Sector Director Julie Bhusal Sharma, Equity Analyst Brian Colello, Sector Director Matthew Donen, Equity Analyst
Capital Allocation Exemplary Exemplary Exemplary Exemplary
Price/Fair Value 1.46 1.26 1.14 0.95
Price/Sales 17.46 13.43 12.81 1.61
Price/Book 21.74 5.98 11.36 2.67
Price/Earning 74.91 52.17 73.55 20.28
Dividend Yield — — — 2.82%
Market Cap 63.94 Bil 28.62 Bil 66.25 Bil 120.89 Bil
52-Week Range 138.76—242.65 194.23—339.55 267.00—468.03 93.67—167.00
Investment Style Large Growth Mid Core Large Growth Large Growth
next 10 years.
EDA tools have existed for decades, gaining importance and sophistication as semiconductor chip
design complexity grew. Advancing technologies require more powerful, precise, and efficient chips, for
which EDA software informs the end-to-end process, spanning planning, design, implementation,
verification, and signoff. The pursuit of Moore's law, which dictates that the performance capability of
electronics should double approximately every 18 months, has become increasingly challenging from
both a technological and economic standpoint (transistor densities increase but cost per transistor does
not decrease). This now more than ever requires cutting-edge design automation tools that enable
power-, performance-, and area-optimized integrated circuits and system on chips and AI capabilities
such as Cadence's Cerebrus product that helps manage chip development costs. Secular trends toward
artificial intelligence and machine learning, hyperscale computing, 5G communications, "Internet of
Things," and autonomous driving, among others, are long-term growth drivers causing heightened
demand for more and increasingly sophisticated semiconductor technology. We expect growing
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demand for such technology and rising chip design costs to drive an uptick in EDA tool adoption and
EDA's increasing share of semiconductor revenue.
Barriers to entry are high in this growing industry. Incumbents with decade-spanning design expertise
advantages and years of consolidation have formed an oligopoly with three main players, namely
Cadence, Synopsys, and Mentor (a Siemens company). Of these, only Cadence and Synopsys offer full-
flow automation of the chip design process. Together, Cadence and Synopsys make up approximately
60% of the EDA market with historical estimates indicating 80%-90% of the EDA market being controlled
by the three firms (with latest ESDA data indicating an estimated 2021 market size of about $9 billion).
Despite having end-to-end offerings, EDA vendors typically find dominance in specific product segments
and capture significant market share there, such as Cadence in analog design, further raising barriers to
entry. We view the EDA market as sheltered from the cyclicality of the semiconductor industry. Growth
drivers are more structural and unwavering in the face of consumer demand, and instead reflect secular
trends toward increasing prevalence and complexity of electronics, and the resulting research and
development spending of semiconductor and systems companies. Accordingly, the EDA industry has
outperformed the semiconductor market over the past decade.
We think Cadence's unified portfolio of EDA tools lends itself to high-touchpoint, deeply integrated
software that informs design flows and creates high switching costs for customers. We believe there
are significant time costs, operational risks, and implementation expenses associated with replacing
Cadence's highly specialized EDA tools within a given design flow. Setting up a design flow with a
specific vendor's EDA software requires complex up-front integration at the infrastructure level, and
product familiarity for engineers becomes crucial given the intricacies of each EDA tool and design
specialization. We note that while both Cadence and Synopsys offer end-to-end full flow software, both
product portfolios are interoperable, and customers have adopted a mix-and-match model of selecting
best-of-breed point solutions for different stages of the design process. For instance, while a customer
may select Cadence's Integrity 3D-IC Platform to complete the circuit design and layout planning of a
digital chip, the chip's physical verification may then be performed by Mentor's Calibre Verification
Platform although the Integrity platform also has interdie physical verification capabilities.
We believe switching costs are high for customers who have already selected a given EDA vendor for a
design component. While product familiarity drives higher switching costs throughout software in
general, we view such stickiness as being exacerbated in chip design. First, productivity gains from
product familiarity drive a faster time to market, which is mission critical in this industry, when winning
new nodes and designs is largely determined by staying ahead of the semiconductor industry's pace of
innovation. Second, as chip design is an incredibly expensive process, the margin for error is virtually
nonexistent and engineers are more likely to prefer tools with which they are familiar.
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Beyond product familiarity, setting up design flows is a complex, time-intensive, and expensive process
that requires engineer training. To replace EDA software from an established design flow would give
rise to business disruption and operational risk, delaying chip production, and would require a repeat of
the extensive implementation process with a new EDA vendor. Finally, EDA tools are mission-critical in
today's IC design environment, further heightening customer switching costs. As evolving market
demand and technological advancement requires smaller, faster, and more powerful chips, it has
become extremely difficult to innovate newer designs without the assistance of EDA tools. As
maintaining Moore's law becomes increasingly difficult and companies require novel design approaches
to attempt to double transistors on the same silicon-substrate area every couple of years, EDA tools
have proven instrumental in the pursuit of this goal, enabling a more holistic, system-level design
approach.
Cadence's origins lie with analog chip design, which is an inherently stickier market than digital design,
where Synopsys began. Analog chips boast more complex and archaic designs than digital chips, with
longer design cycles and more loyal, risk-averse customers. While Synopsys holds a larger piece of the
overall EDA market, we believe Cadence's core EDA segment benefits from a wider moat than Synopsys'
does due to the company's exposure to analog chip design. Cadence is the market leader in analog EDA
tools, holding over 80% of the market share for more than two decades now. With that being said, the
custom IC product group, within which Cadence's analog EDA tools reside, only accounts for 22% of
total revenue as of fiscal 2022, compared with the digital IC product group's 28% revenue share. We
believe Cadence's prudent investments into building out a digital EDA suite have better aligned the firm
with a larger, faster-growing space, wherein the firm has found strength in advanced nodes (5nm and
below) in particular. Complementing the growth vector from the digital business, we believe Cadence's
market leadership in analog design automation tools adds incremental stickiness to the firm's overall
EDA portfolio.
We find the stickiness of Cadence's solutions to be reflected in its excellent user metrics. Reflecting the
mission-criticality of EDA tools, Cadence exhibits negligible churn, with customer retention consistently
at approximately 100%, and has relationships with all major chip design companies in the United States
(be it pure semiconductor companies or systems companies). As more non-pureplay systems companies
build chips in-house and as foundries move from tech node to tech node, we expect the industry to
gravitate more heavily toward standardized design products such as those provided by Cadence to keep
products competitive with the constantly advancing standard.
Cadence offers a targeted portfolio of semiconductor intellectual property solutions that focuses on
profitability. IP solutions can be thought of as Legos. When building a Lego house, blocks can be used
to assemble the foundation, ensuring that the house's crucial but nondifferentiating aspects work with
a tried-and-tested consistency, leaving more time for the designer to customize the more differentiating
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aspects of his Lego house. Similarly, Cadence's IP products provide components that serve as building
blocks for larger chip systems. IP accounts for roughly 12% of the company as of fiscal 2022.
We believe Cadence's design blocks give rise to intangible assets. The company has aligned the focus of
its IP portfolio on profitable growth, rather than just top-line growth, leading to a smaller, more curated
portfolio than that of Synopsys. Cadence's differentiation in IP is in IP for more advanced nodes and
Tensilica, which is digital signal processing IP that commands a price premium. Even though Synopsys
has a slight advantage relative to Cadence on the IP front, we believe that Cadence's brand and history
give it an edge over other IP players. Cadence has approximately 6% market share in the roughly $5
billion IP market, with the top three players (ARM, Synopsys, Cadence) making up about two thirds of
the IP market, per IPnest. As technological complexity and both design and packaging sophistication
have increased over the years, Cadence's IP portfolio has increasingly reinforced the company's moat.
We believe Cadence's IP offerings complement the core EDA portfolio well, giving rise to cross-selling
opportunities within an existing EDA customer, and vice versa.
Finally, Cadence has leveraged its core competencies in computational software to expand into system
analysis and design. This business group is a complementary and increasingly necessary extension of
the core EDA group, as it considers system-level electromechanical, thermal, and fluid dynamics in the
design, packaging, and verification of an IC package. The business adds an addressable market
opportunity of $6 billion to $8 billion, of which between $2 billion and $3 billion have been addressed so
far with current capabilities. With more components to optimize and larger amounts of data (in a system
versus a chip), comes a greater opportunity to leverage AI. In addition to obvious PPA efficiencies,
Cadence's Cerebrus product democratizes chip design by enabling younger, less-established designers
to build advanced, intricate chips, expanding the customer base for EDA software. We believe the
system analysis and design software is privy to the same switching costs as the core EDA software.
Overall, this business represents approximately 12% of total revenue as of fiscal 2022 and supports
Cadence's moat via its high switching costs.
Fair Value and Profit Drivers Brian Colello, CPA, Sector Director, 15 Feb 2023
We assign Cadence a fair value estimate of $161 per share, implying a fiscal 2023 adjusted price/
earnings multiple of 32 times.
We model a five-year compound annual growth rate, or CAGR, of 11% through fiscal 2027. We expect
that as secular trends toward artificial intelligence, 5G communications, and cloud computing, among
others, accelerate, Cadence will benefit from both the rising complexity of chip designs and the
advancing digitalization of various end markets. We expect growing demand for such technology and
rising chip design costs to drive an uptick in EDA tool adoption.
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We expect the EDA, IP, and system design and analysis businesses to grow at different rates. We
expect the core EDA segment, which consists of digital IC design, custom/analog IC design, and
functional verification, to grow at a low-double digit pace through fiscal 2027. While EDA growth has
historically tracked the mid-single-digit growth rate of semiconductor R&D spend, we believe an
expansion of in-house chip design by systems companies will allow Cadence to maintain the double-
digit growth rate experienced in the past couple of years throughout our explicit forecast. Within EDA,
we expect the digital design suite to grow at an 13% CAGR over the next three years (typical design
contracts are three years), while we expect the custom/analog design suite to grow at a 10% CAGR over
the same period.
We expect IP revenue to grow at a low-double-digit rate, bolstered by a growth in chip customization as

Moore’s law slows and chip designers seek to differentiate their products. We foresee IP revenue
remaining around 12% of total revenue as Cadence remains focused on its curated, profitability-focused
portfolio.
Last, we expect the system business to grow at a 15% CAGR over the next three years as the firm builds
out this natural extension of its core competency within EDA tools amid growing importance of
multichiplet architecture and 3D-IC advanced packaging. We foresee system revenue increasing from
12% of total revenue in fiscal 2022 to 14% of revenue in fiscal 2027.
We expect GAAP operating margins to expand from 30% in fiscal 2022 to 40% in fiscal 2027. We expect
IP’s profitability focus, expansion of the margin-accretive system business, and operating leverage to
support this expansion. We believe that with scale, Cadence can attain 47% non-GAAP operating
margins by fiscal 2027.
Risk and Uncertainty Brian Colello, CPA, Sector Director, 15 Feb 2023
We assign Cadence a High Morningstar Uncertainty Rating. Given the interoperability of EDA solutions,
we believe that Cadence cannot exert much pricing power as businesses avoid vendor lock-in and can
switch to a different EDA vendor if prices rise too much. Second, as Cadence increases its system
design and analysis business, the firm enters a new and highly competitive system analysis market,
competing with incumbents like Ansys.
Third, we view the growth of China’s domestic semiconductor industry as posing risks for U.S.-based
EDA firms like Cadence. China's semiconductor industry is expected to see a large amount of
government and private investment flow into its infrastructure over the coming years, and we expect
this to lead to further growth in its domestic EDA industry to support the growing semiconductor
landscape. These EDA firms could compete against Cadence for Chinese business. Further, geopolitical
tensions have placed several high-profile Chinese designers on the entity list, restricting Cadence from
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doing business with these customers and further encouraging China EDA firms to fill the supply void.
Cadence faces low levels of environmental, social, and governance, or ESG, risk. The key area where the
firm is exposed to risk is human capital management. Given the complexity associated with EDA tool
development, Cadence faces intense competition for skilled labor in the space. If the firm is unable to
effectively source and integrate new employees, it could hinder innovation and affect Cadence’s
competitive positioning. In addition, Cadence handles sensitive data, and a breach could raise legal and
regulatory hurdles and adversely affect its reputation.
Capital Allocation Brian Colello, CPA, Sector Director, 15 Feb 2023

We assign Cadence an Exemplary capital allocation rating. In our opinion, this rating is reflective of our
assessments of a sound balance sheet, exemplary investments with regard to strategic priorities and
execution, and appropriate shareholder distribution policies.
Cadence maintains a sound balance sheet, with $882 million in cash and cash equivalents and $648
million in debt as of December 2022.
Cadence’s capital deployment strategy focuses on internal investments, acquisitions, and share
repurchases. Cadence does not pay dividends. Between fiscal 2020 and fiscal 2022, Cadence
repurchased approximately $1.5 billion of company shares and upped its previous $750 million buyback
authorization to $1.750 billion in August 2021. As of December 2022, $1.1 billion of the share repurchase
authorization remain. In our view, management has done a great job building out the platform through
internal innovation and by identifying value-additive acquisitions. Cadence’s newer system design and
analysis business is the fastest-growing business area as internal investments around system-level
electromechanical and thermal analysis and acquisitions in computational fluid dynamics are proving to
be highly value-accretive extensions to Cadence’s core EDA tools.
In addition to the acquisitions made around CFD, namely Pointwise for $31.4 million and NUMECA for
$188.6 million in 2021, acquisitions have supported growth in other business areas. Over the years,
there has been consolidation within the EDA space that has allowed Cadence to emerge as a leader in
terms of market share. Cadence has engaged in several small tuck-in acquisitions, though the firm has
made some sizable investments as well. Notable acquisitions in the IP space include those of Denali for
$309.4 million in 2010 and Tensilica for a $319.3 million in 2013. Other acquisitions include those of
AWR and Integrand in 2020 for $195.6 million in aggregate, which built upon Virtuoso RF technology to
address growing adoption of 5G communications.
Cadence was founded in 1988 following a merger between SDA Systems and ECAD to provide EDA
solutions in a rapidly burgeoning chip design market. Lip-Bu Tan has served as CEO since 2009, and has
held a board position at the firm since 2004. Tan was appointed amid the financial crisis as previous
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CEO Michael Fister and other key executives stepped down during the tumultuous time. Since then, Tan
has executed prudent strategies to strengthen Cadence’s foothold in the EDA and IP space, as well as to
expand into new lucrative markets such as system analysis. John Wall has served as CFO since 2017
and has instituted several cost-cutting and restructuring programs to drive more returns to the bottom
line. As of January 2023, Tan owned approximately 0.32% of Cadence stock, with the directors and
executive officers cumulatively holding 4.23%.
Analyst Notes Archive
Cadence Design Systems Earnings: Pleasing Start to the Year Supported by Robust Demand Abhinav
Davuluri, CFA, Strategist, 25 Apr 2023
Narrow-moat Cadence Design Systems delivered solid first-quarter results that met management’s
expectation for revenue and exceeded guidance for adjusted EPS. Although management guided to
sequentially lower second-quarter revenue, it was confident of a stronger second half of the year thanks
to more software renewals relative to the first half. Secular trends such as generative artificial
intelligence are supporting demand for Cadence’s products as well as enhancing the firm’s own digital,
verification, and systems offerings. We maintain our $161 fair value estimate and view the shares as
overvalued at current levels; we think the market is too optimistic on the firm’s growth prospects.
First-quarter revenue increased 13% year over year to $1.02 billion. Growth continued to be broad-
based, with each segment achieving double-digit growth compared with the prior-year period. We were
especially impressed by the verification business growing 32% year over year, with continued demand
for the Palladium Z2 and Protium X2 hardware platforms. We also noted strength in the digital
integrated circuit business, with increasing demand for Cadence’s generative AI-based solutions. We
were pleased with the steadfast growth of the intellectual property business at 11% year over year.
Non-GAAP operating margin was 42.2% for the quarter, compared with 44.0% in the year-ago period,
and non-GAAP EPS came in at $1.29, up from the prior-year period’s $1.17.
For the second quarter, management expects revenue of $960 million-$980 million, non-GAAP operating
margin of 40%-41%, and non-GAAP EPS of $1.15-$1.19. Management also raised its full-year outlook,
now expecting revenue of $4.03 billion-$4.07 billion, up from $4.00 billion-$4.06 billion. Non-GAAP
operating margin is expected to be 41.0%-42.2%, and non-GAAP EPS is now expected to come in at
$4.96-$5.04, up from the prior range of $4.90-$5.00.
Cadence Finishes 2022 With Strong Results and an Encouraging Outlook; Maintain FVE Abhinav
Davuluri, CFA, Strategist, 14 Feb 2023
Narrow-moat Cadence Design Systems reported strong fourth-quarter results, with results exceeding
management’s guidance. Secular trends in artificial intelligence/machine learning, 5G communications,
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and hyperscale computing continue to be a boon for Cadence and drive digital transformation
throughout its end-markets. We maintain our thesis that Cadence is in a uniquely strong position to
capitalize on two semiconductor design industry tailwinds: advancing technologies requiring system-
level designs, packaging, and analysis and increasing software content for systems companies. When
considering macroeconomic uncertainty along with our above-consensus expectations we are
maintaining our $161 per share fair value estimate, and view shares as slightly overvalued after trading
up to $191 after hours.
Fourth-quarter revenue grew 16% year over year to $900 million. Growth was broad-based with each
segment growing double-digits compared with the year-ago period. Its verification business was also a
strong suit growing 28% year over year. We also took note of strength in its systems design and analysis
business, which grew 27% year over year as systems and semiconductors increasingly converge. Lastly,
we are encouraged by continued growth of its intellectual property business, with 12% year-over-year
growth in both the quarter and year.
Cadence Enjoys Stellar Growth Despite an Uncertain Landscape; Raising FVE to $161 Abhinav
Davuluri, CFA, Strategist, 25 Oct 2022
Narrow-moat Cadence Design Systems reported a strong third quarter, posting results exceeding
management’s guidance and our at-consensus expectations. Cadence continues to benefit from secular
trends toward hyperscale computing, 5G communications, and artificial intelligence/machine learning,
which all possess intensified demand for computing complexity, connectivity, and storage capability.
We believe Cadence holds a unique position to capitalize on two semiconductor design industry
tailwinds: advancing technologies requiring system-level designs, packaging, and analysis and
increasing software content for systems companies. We remain impressed with Cadence’s deployment
of expertise across software and hardware solutions and view management’s raised outlook for fiscal
2022 as appropriate. While there is looming concern over macroeconomic uncertainty involving recent
chip export restrictions to China, we are confident in Cadence’s robust business and raise our fair value
estimate to $161 from $157. We view shares as fairly valued.
Third-quarter revenue grew 20% year over year to $903 million, above consensus of $870 million.
Growth continued to be broad-based, with each segment achieving double-digit growth compared with
the year-ago period. We observed stellar growth in the verification business, up 31% year over year, led
by a mix of Xcelium and hardware sales. The systems design and analysis business was up 29% year
over year, as Cadence expands its reach across intensive end-markets, such as aerospace and defense
and high-tech electronics. We were also pleased to see continued strength in the IP business, as IP
outsourcing gathers momentum.
Non-GAAP operating margin for the quarter was 39.4%, compared with 35.8% in the year-ago period,
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30 Jun 2023 25 Oct 2022 03:42, UTC
and non-GAAP earnings per share came in at $1.06, up from the year-ago period’s $0.80. We continued
to observe strong growth from hardware sales driven by the verification business in the up-front
revenue, strengthening margins.
Cadence Enjoys Being in High Demand With a Strong Finish to the Quarter; Raising FVE to $157
Abhinav Davuluri, CFA, Strategist, 26 Jul 2022
Narrow-moat Cadence Design Systems reported a strong second quarter, with results that meaningfully
exceeded management’s guidance and our at-consensus expectations. Cadence continues to benefit
from secular trends toward hyperscale computing, 5G communications, and artificial intelligence/
machine learning, which are all increasing in computing complexity, connectivity, and storage needs.
Amid the intensified semiconductor design demand environment, we believe Cadence holds a unique
position to capitalize on two key industry dynamics: advancing technologies requiring system-level
designs, packaging, and analysis and increasing software content for systems companies. We are
impressed by Cadence’s deployment of expertise across software and hardware solutions thus far and
view management’s raised outlook for fiscal 2022 as appropriate. With this, we are raising our fair value
estimate to $157 per share from $146 and view the shares as slightly overvalued.
Second-quarter revenue grew 18% year over year to $858 million. Growth continued to be broad-based,
with each segment achieving double-digit growth compared with the prior-year period. We observed
outsize growth in the intellectual property business, up 30% year over year, fueled by IP outsourcing.
The systems design and analysis business was up 29% year over year, driven by Cadence’s expansion
across end markets. The verification business was up 13%, where success was driven by secular
demand for the Palladium Z2 and Protium X2 hardware platforms.
Non-GAAP operating margin for the quarter was 42.4%, compared with 39.6% in the year-ago period,
and non-GAAP earnings per share came in at $1.08, up from the year-ago period’s $0.86. We continued
to observe strong growth from hardware sales in the up-front revenue mix, strengthening margins.
Cadence’s Unrelenting Demand Landscape Drives Q1 Outperformance; Raising FVE to $146 Victoria
Radke, Analyst, 26 Apr 2022
Narrow-moat Cadence Design Systems reported a strong first quarter, with the top and bottom line
exceeding both management’s and our at-consensus expectations. Cadence continues to benefit from
secular trends toward hyperscale computing, 5G communications, and AI/ML, which are all accelerating
computing complexity, connectivity, and storage needs. While Cadence, like others in the space,
benefits from this golden era of semiconductor design demand, we view the firm to be uniquely
positioned to favorably capitalize on two key industry dynamics: advancing technologies requiring
system-level designs, packaging, and analysis, and systems companies with more software content
requiring hardware platforms for software bring-up. As a result, we view the firm as jointly benefiting
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 25 Oct 2022 03:42, UTC
from an overall industry boom and a preferential positioning with its systems portfolio, and view
management’s raised outlook for fiscal 2022 as appropriate. We are raising our fair value estimate to
$146 per share, from $138, and view shares as slightly overvalued.
First-quarter revenue grew 23% year over year to $901.8 million. Although growth was broad-based,
with each business group achieving double-digit growth against the prior-year period, we observed
outsize growth in the verification business, up 30% year over year. Success within the verification
business was again fueled by the Palladium Z2 and Protium X2 hardware platforms, which saw
heightened demand across all end-markets. The systems business, which is leading Cadence’s
expansion beyond its core EDA space, grew 22% year over year as multidie integrated systems, enabled
by Cadence’s Integrity 3D-IC solution, become the standard for supporting advanced technologies.
Non-GAAP operating margin for the quarter was 44%, up 600 basis points from the year-ago period, and
non-GAAP EPS was $1.17, up from the year-ago period’s $0.83 per share. We observed strong revenue
growth from outsize hardware sales trickling down into the bottom line.
Cadence’s Electronic Design Automation Is Behind the Curtain of Semiconductor Success; $138 FVE
Victoria Radke, Analyst, 21 Mar 2022
Cadence provides electronic design automation software, intellectual property, and system design and
analysis products that are critical to the semiconductor chip design process. We believe Cadence offers
a compelling value proposition for investors looking to capitalize on secular trends in technology that are
increasing the complexity of chip designs and advancing the digitalization of various end markets. Our
fair value estimate for Cadence is $138 per share, up from $127 as we model stronger near-term growth
and profitability. With shares trading at around $155, we view the narrow-moat stable-moat-trend
company as slightly overvalued.
We believe Cadence's products are transformational in enabling increasingly complex integrated circuit
and system-on-chip design. Advancing technologies require these more powerful, precise, and efficient
chips, for which EDA software informs the end-to-end process. Cadence is the second-largest EDA
vendor, behind Synopsys, having multidecade-spanning market dominance in analog design and
emerging as a force in digital design. While we expect Cadence to grow at a slightly more muted pace
than Synopsys, we view the firm's analog stability, focus on profitability, and building of a holistic
offering that includes unique system-level solutions as creating a compelling, risk-mitigated narrative.
We expect Cadence to grow at an 11% CAGR through 2026, as we expect an uptick in EDA tool
adoption from growing demand for new technologies and rising chip design costs. We expect the
systems business to support growth as well as designs trend from chip-level to board-level and multidie
integrated systems become the standard for supporting advanced technologies.
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 25 Oct 2022 03:42, UTC
We expect the IP business’ profitability focus, expansion of the margin-accretive systems business, and
operating leverage to support margin expansion. We expect Cadence to increase non-GAAP operating
margin from 35% in fiscal 2021 to 43% in fiscal 2026. K
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Competitors Price vs. Fair Value
Ansys Inc ANSS
Last Close: 330.27

23 Feb 2023 20:31, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
1.15 1.84 1.62 1.66 1.00 1.26 Price/Fair Value
-3.15 80.08 41.33 10.26 -39.77 36.71 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 23 Feb 2023 20:31, UTC.
Synopsys Inc SNPS
Last Close: 435.41

1 Dec 2022 06:37, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
— 1.30 1.75 1.29 0.84 1.14 Price/Fair Value
-1.17 65.24 86.24 42.15 -13.35 36.37 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 1 Dec 2022 06:37, UTC.
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Siemens AG SIE
Fair Value: 160.00

10 Feb 2023 16:56, UTC
200
Last Close: 152.54
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.76 0.96 1.00 1.17 0.89 0.95 Price/Fair Value
-12.97 23.58 5.66 32.11 -13.16 20.08 Total Return %
Morningstar Rating
Total Return % as of 30 Jun 2023. Last Close as of 30 Jun 2023. Fair Value as of 10 Feb 2023 16:56, UTC.
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TM TM
30 Jun 2023 7 Jun 2023 05:00, UTC
30 Jun 2023 25 Oct 2022 03:42, UTC
Morningstar Historical Summary

Financials as of 31 Mar 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Mil) 1,460 1,581 1,702 1,816 1,943 2,138 2,336 2,683 2,988 3,562 1,022 3,682
Revenue Growth % 10.1 8.3 7.7 6.7 7.0 10.0 9.3 14.8 11.4 19.2 13.3 16.7
EBITDA (USD Mil) 295 331 414 380 456 518 621 804 916 1,204 364 1,218
EBITDA Margin % 20.2 20.9 24.3 21.0 23.5 24.2 26.6 30.0 30.7 33.8 35.6 33.1
Operating Income (USD Mil) 207 217 290 286 333 407 500 655 778 1,074 322 1,077
Operating Margin % 14.2 13.7 17.0 15.7 17.2 19.1 21.4 24.4 26.0 30.2 31.6 29.3
Net Income (USD Mil) 164 159 252 203 204 346 989 591 696 849 242 855
Net Margin % 11.3 10.1 14.8 11.2 10.5 16.2 42.3 22.0 23.3 23.8 23.7 23.2
Diluted Shares Outstanding (Mil) 295 307 312 291 280 281 281 280 279 275 273 274
Diluted Earnings Per Share (USD) 0.56 0.52 0.81 0.70 0.73 1.23 3.53 2.11 2.50 3.09 0.89 3.13
Dividends Per Share (USD) — — — — — — — — — — — —
Valuation as of 30 Jun 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 2.9 3.7 3.9 4.2 6.1 5.9 8.4 15.1 17.5 12.9 17.5 17.5
Price/Earnings 9.0 43.1 27.4 30.8 45.5 52.4 45.7 35.5 75.2 56.5 75.2 75.2
Price/Cash Flow 11.9 18.9 16.8 20.3 21.6 20.4 27.7 41.0 51.0 37.2 54.9 54.9
Dividend Yield % — — — — — — — — — — — —
Price/Book 3.7 4.3 4.5 7.5 11.7 9.7 13.1 15.9 19.6 16.2 21.7 21.7
EV/EBITDA 13.0 16.0 14.1 19.5 25.8 23.1 30.9 46.6 55.7 36.4 0.0 0.0
Operating Performance / Profitability as of 31 Mar 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 7.0 5.6 9.1 9.1 9.0 14.1 34.0 16.2 16.7 17.8 4.7 17.9
ROE % 15.9 12.8 18.6 19.2 23.6 30.4 58.3 25.7 26.6 31.0 8.5 30.0
ROIC % 13.2 9.7 16.3 13.8 13.8 20.8 47.8 22.1 23.1 24.8 6.9 26.0
Asset Turnover 0.6 0.6 0.6 0.8 0.9 0.9 0.8 0.7 0.7 0.7 0.2 0.8
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % — 20.7 20.0 46.5 39.5 21.1 17.0 15.6 14.2 22.3 18.1 —
Equity/Assets % 47.6 41.6 58.7 35.4 40.9 52.2 62.6 63.1 62.5 53.4 56.9 —
Total Debt/EBITDA 1.1 2.1 0.8 1.8 1.6 0.9 0.7 0.6 0.5 0.7 1.9 —
EBITDA/Interest Expense 7.9 9.7 14.6 16.1 17.8 22.4 33.0 38.7 54.0 52.5 39.3 43.4
Morningstar Analyst Historical/Forecast Summary as of 25 May 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 17.3 12.4 15.8 14.3 13.0
Revenue (USD Mil) 2,988 3,562 4,054 4,477 4,933 Price/Earnings 56.6 37.6 46.7 46.3 40.1
Revenue Growth % 11.4 19.2 13.8 10.4 10.2 Price/Cash Flow 49.9 39.4 46.6 45.3 38.2
EBITDA (USD Mil) 920 1,206 1,385 1,669 1,910 Dividend Yield % — — — — —
EBITDA Margin % 30.8 33.9 34.2 37.3 38.7 Price/Book 19.0 16.1 17.4 13.5 10.9
EV/EBITDA 55.4 36.4 46.0 38.2 33.3
Operating Income (USD Mil) 778 1,074 1,214 1,492 1,737
Operating Margin % 26.0 30.2 29.9 33.3 35.2
Net Income (USD Mil) 918 1,173 1,369 1,381 1,589
Net Margin % 30.7 32.9 33.8 30.8 32.2
Diluted Shares Outstanding (Mil) 279 275 273 273 272
Diluted Earnings Per Share(USD) 3.29 4.27 5.02 5.06 5.85
Dividends Per Share(USD) 0.00 0.00 0.00 0.00 0.00
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Appendix
Historical Morningstar Rating
Cadence Design Systems Inc CDNS 30 Jun 2023 21:16, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- - - - - QQ QQ QQ QQ QQ QQ QQQ
QQQ QQQ QQQ QQQ QQQ QQ QQQ QQQ QQQ QQ QQ QQ
Q Q QQ QQ QQ QQ QQ QQ QQ QQ QQ Q
Q Q Q Q Q Q Q Q Q QQ QQ QQ
QQ QQ QQ QQ Q Q Q - - - - -
- - - - - - - - - - - -
Ansys Inc ANSS 30 Jun 2023 21:16, UTC
- - - - - QQ QQ QQ QQ QQ QQ QQQ
QQQ QQQ QQQQ QQQ QQQ QQ QQQ QQQ QQ QQ QQ Q
Q Q Q Q Q Q Q Q Q Q Q Q
Q Q Q Q Q Q Q Q QQ Q Q Q
Q Q Q - Q Q Q Q Q Q Q QQ
QQ QQ QQ Q Q QQ QQ Q Q Q Q Q
Synopsys Inc SNPS 30 Jun 2023 21:16, UTC
- - - - - QQQ QQQ QQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQ QQ QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ Q
Q Q Q Q Q Q Q Q QQ QQ QQ QQ
QQ QQ QQ QQ QQ QQ QQ - - - - -
- - - - - - - - - - - -
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Siemens AG SIE 30 Jun 2023 23:47, UTC
- - - - - QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQ
QQ QQ QQQ QQ QQQ QQQ QQQ QQQ QQ QQ QQQ QQQ
QQQ QQQ QQQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQQ QQQQ QQQ
QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQ
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Research Methodology for Valuing Companies
Overview timate of a firm’s cost of capital, or weighted average In this stage, which can last five to 10 years, analysts
At the heart of our valuation system is a detailed projec- cost of capital (or WACC). Without a moat, profits are make full financial statement forecasts, including items
tion of a company’s future cash flows, resulting from our more susceptible to competition. We have identified five such as revenue, profit margins, tax rates, changes in
analysts’ research. Analysts create custom industry and sources of economic moats: intangible assets, switching workingcapital accounts, and capital spending. Based on
company assumptions to feed income statement, balance costs, network effect, cost advantage, and efficient scale. these projections, we calculate earnings before interest,
sheet, and capital investment assumptions into our glob- after taxes (EBI) and the net new investment (NNI) to de-
ally standardized, proprietary discounted cash flow, or Companies with a narrow moat are those we believe are rive our annual free cash flow forecast.
DCF, modeling templates. We use scenario analysis, inde- more likely than not to achieve normalized excess returns
for at least the next 10 years. Wide-moat companies are Stage II: Fade
pth competitive advantage analysis, and a variety of other
those in which we have very high confidence that excess The second stage of our model is the period it will take
analytical tools to augment this process. Moreover, we
returns will remain for 10 years, with excess returns more the company’s return on new invested capital—the re-
think analyzing valuation through discounted cash flows
likely than not to remain for at least 20 years. The longer turn on capital of the next dollar invested (“RONIC”)—to
presents a better lens for viewing cyclical companies,
a firm generates economic profits, the higher its intrinsic decline (or rise) to its cost of capital. During the Stage II
high-growth firms, businesses with finite lives (e.g.,
value. We believe low-quality, no-moat companies will period, we use a formula to approximate cash flows in
mines), or companies expected to generate negative
see their normalized returns gravitate toward the firm’s lieu of explicitly modeling the income statement, balance
earnings over the next few years. That said, we don’t dis-
cost of capital more quickly than companies with moats. sheet, and cash flow statement as we do in Stage I. The
miss multiples altogether but rather use them as support-
length of the second stage depends on the strength of
ing cross-checks for our DCF-based fair value estimates.
When considering a company's moat, we also assess the company’s economic moat. We forecast this period to
We also acknowledge that DCF models offer their own
whether there is a substantial threat of value destruction, last anywhere from one year (for companies with no eco-
challenges (including a potential proliferation of estim-
stemming from risks related to ESG, industry disruption, nomic moat) to 10–15 years or more (for wide-moat com-
ated inputs and the possibility that the method may miss
financial health, or other idiosyncratic issues. In this con- panies). During this period, cash flows are forecast using
shortterm market-price movements), but we believe these
text, a risk is considered potentially value destructive if its four assumptions: an average growth rate for EBI over the
negatives are mitigated by deep analysis and our
occurrence would eliminate a firm’s economic profit on a period, a normalized investment rate, average return on
longterm approach.
cumulative or midcycle basis. If we deem the probability new invested capital (RONIC), and the number of years
of occurrence sufficiently high, we would not characterize until perpetuity, when excess returns cease. The invest-
Morningstar’s equity research group (”we,” “our”) be-
the company as possessing an economic moat. ment rate and return on new invested capital decline un-
lieves that a company’s intrinsic worth results from the
til a perpetuity value is calculated. In the case of firms
future cash flows it can generate. The Morningstar Rating
To assess the sustainability of excess profits, analysts per- that do not earn their cost of capital, we assume marginal
for stocks identifies stocks trading at a discount or premi-
form ongoing assessments of the moat trend. A firm’s ROICs rise to the firm’s cost of capital (usually attribut-
um to their intrinsic worth—or fair value estimate, in
moat trend is positive in cases where we think its sources able to less reinvestment), and we may truncate the
Morningstar terminology. Five-star stocks sell for the
of competitive advantage are growing stronger; stable second stage.
biggest risk adjusted discount to their fair values, where-
as 1-star stocks trade at premiums to their intrinsic worth. where we don’t anticipate changes to competitive ad-
vantages over the next several years; or negative when Stage III: Perpetuity
Four key components drive the Morningstar rating: (1) our we see signs of deterioration. Once a company’s marginal ROIC hits its cost of capital,
assessment of the firm’s economic moat, (2) our estimate we calculate a continuing value, using a standard per-
of the stock’s fair value, (3) our uncertainty around that 2. Estimated Fair Value petuity formula. At perpetuity, we assume that any
fair value estimate and (4) the current market price. This Combining our analysts’ financial forecasts with the growth or decline or investment in the business neither
process ultimately culminates in our singlepoint star rat- firm’s economic moat helps us assess how long returns creates nor destroys value and that any new investment
ing. on invested capital are likely to exceed the firm’s cost of provides a return in line with estimated WACC.
capital. Returns of firms with a wide economic moat rat-
ing are assumed to fade to the perpetuity period over a Because a dollar earned today is worth more than a dollar
1. Economic Moat
longer period of time than the returns of narrow-moat earned tomorrow, we discount our projections of cash
The concept of an economic moat plays a vital role not
firms, and both will fade slower than no-moat firms, in- flows in stages I, II, and III to arrive at a total present
only in our qualitative assessment of a firm’s long-term
creasing our estimate of their intrinsic value. value of expected future cash flows. Because we are
investment potential, but also in the actual calculation of
modeling free cash flow to the firm—representing cash
our fair value estimates. An economic moat is a structural
Our model is divided into three distinct stages: available to provide a return to all capital providers—we
feature that allows a firm to sustain excess profits over a
discount future cash flows using the WACC, which is a
long period of time. We define economic profits as re-
weighted average of the costs of equity, debt, and pre-
turns on invested capital (or ROIC) over and above our es- Stage I: Explicit Forecast
ferred stock (and any other funding sources), using ex-
Morningstar Equity Research Star Rating Methodology pected future proportionate long-term, market-value
weights.
3. Uncertainty Around That Fair Value Estimate

Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
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aimed at identifying the confidence we should have in as- Morningstar Equity Research Star Rating Methodology
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain factors.
we are about the potential dispersion of outcomes, the For more details about our methodology, please go to
greater the discount we require relative to our estimate of https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
the value of the firm before we would recommend the low:
purchase of the shares. In addition, the Uncertainty Rat- Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad-
ing provides guidance in portfolio construction based on justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
risk tolerance. Scenario analysis developed by our analysts indicates
compare it with the stock’s current market price on a
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
Our Uncertainty Ratings are: Low, Medium, High, Very
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
High, and Extreme.
which the stock is listed is open. Our analysts keep close ing upside potential.
tabs on the companies they follow, and, based on thor-
Margin of Safety
ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Qualitative Analysis
QRating estimates as warranted. justed return is likely.
Uncertainty Ratings QQQQQRating
Low 20% Discount 25% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
Medium 30% Discount 35% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
High 40% Discount 55% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Very High 50% Discount 75% Premium
serve as a gauge of the broader market’s valuation. When
Extreme 75% Discount 300% Premium QQ We believe investors are likely to receive a less than
there are many 5-star stocks, the stock market as a whole
is more undervalued, in our opinion, than when very few fair risk-adjusted return.
Our uncertainty rating is based on the interquartile range,
companies garner our highest rating.
or the middle 50% of potential outcomes, covering the Q Indicates a high probability of undesirable risk-adjus-
25th percentile–75th percentile. This means that when a ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
stock hits 5 stars, we expect there is a 75% chance that time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
the intrinsic value of that stock lies above the current our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
market price. Similarly, when a stock hits 1 star, we excessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
pect there is a 75% chance that the intrinsic value of that leaving the investor exposed to Capital loss.
prices may adjust).
stock lies below the current market price.
Our star ratings are guideposts to a broad audience and Other Definitions
4. Market Price individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
The market prices used in this analysis and noted in the goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
report come from exchange on which the stock is listed needs, and complete investment portfolio, among other
which we believe is a reliable source.
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Capital Allocation Rating: Our Capital Allocation (or Sustainalytics analyzes over 1,300 data points to assess a situation or particular needs of any specific recipient. This
Stewardship) Rating represents our assessment of the company’s exposure to and management of ESG risks. In publication is intended to provide information to assist in-
quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un- stitutional investors in making their own investment de-
lar emphasis on the firm’s balance sheet, investments, managed ESG Risks represented as a quantitative score. cisions, not to provide investment advice to any specific
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale investor. Therefore, investments discussed and recom-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
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Morningstar Equity Analyst Report | Report as of 1 Jul 2023 05:51, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 22

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Price vs. Fair Value

Last Close: 234.52

150 Over Valued

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Bears Say Brian Colello, CPA, Sector Director, 25 May 2023

with relative ease, which could have an impact on long-term growth.

competitive system analysis market, competing with incumbents like Ansys.

Economic Moat Brian Colello, CPA, Sector Director, 15 Feb 2023

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Economic Moat Narrow Wide Narrow Narrow

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

We expect IP revenue to grow at a low-double-digit rate, bolstered by a growth in chip customization as

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Capital Allocation Brian Colello, CPA, Sector Director, 15 Feb 2023

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Analyst Notes Archive

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Competitors Price vs. Fair Value

Ansys Inc ANSS

Last Close: 330.27

300 Over Valued

Synopsys Inc SNPS

Last Close: 435.41

300 Over Valued

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Fair Value: 160.00

Cadence Design Systems Inc CDNS QQ 30 Jun 2023 21:16, UTC

Morningstar Historical Summary

Valuation as of 30 Jun 2023

Morningstar Analyst Historical/Forecast Summary as of 25 May 2023

Ansys Inc ANSS 30 Jun 2023 21:16, UTC

Synopsys Inc SNPS 30 Jun 2023 21:16, UTC

Siemens AG SIE 30 Jun 2023 23:47, UTC

Research Methodology for Valuing Companies

3. Uncertainty Around That Fair Value Estimate

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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