Cadence Design Systems, Inc.CDNSNASDAQ

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DCF Valuation

DCF Valuation Summary

Strong Sell

Fair Value: $216.33 per share(market-calibrated)

-28.0%

Upside to Fair Value

Current

$300.63

Pure Model

$188.23

Fair Value

$216.33

Bull Case

$245.02

Bear Case

$141.73

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

Unreachable

Calibrated Growth

75/25 blend

Market price implies assumptions beyond model range. Fair value blends 75% model / 25% market price.

What's Driving This Ratingfor CDNS

✓

CapEx already efficient

CapEx at 2.18% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 36.09% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

⚠

Analyst growth decelerates sharply

Revenue growth drops from 13.73% in Year 1 to 3.75% by Year 5 (per analyst consensus). This growth deceleration is a key reason the model may undervalue the stock if growth re-accelerates.

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $144.77/share (20.5x terminal FCF) while exit multiple gives $231.68/share (40.3x terminal FCF). The 28x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.75% growth is more conservative. The base case averages both methods.

⚠

Market price exceeds model's maximum

Even with the most optimistic terminal growth the model allows, it can't reach $300.63. The market is pricing in factors beyond the DCF framework — possibly optionality, brand premium, or expectations of margin/growth inflection not yet in analyst estimates.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 69.45% indicates efficient cash generation. FCF reaches $2.8B by Year 10 (27.26% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)1.00

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)9.02%

Cost of Debt

Pre-tax Cost of Debt2.17%

Tax Rate27.14%

After-tax Cost of Debt1.58%

Equity Weight (E/V)97.05%

Debt Weight (D/V)2.95%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (97.05% × 9.02%) + (2.95% × 1.58%)

= 8.80%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$6.0B	$7.4B	$8.5B	$9.1B	$10.2B
EBIT	$2.2B	$2.7B	$3.1B	$3.3B	$3.7B
Tax	$590M	$723M	$829M	$892M	$996M
NOPAT	$1.6B	$1.9B	$2.2B	$2.4B	$2.7B
+ Depreciation	$190M	$233M	$267M	$287M	$321M
- Capex	$131M	$161M	$185M	$199M	$222M
- Δ NWC	$2M	$2M	$1M	$1M	$1M
Free Cash Flow	$1.6B	$2.0B	$2.3B	$2.5B	$2.8B
Discount Factor	0.919	0.776	0.656	0.554	0.430
Present Value	$1.5B	$1.6B	$1.5B	$1.4B	$1.2B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$2.8B

Terminal Growth Rate3.75%

WACC8.80%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$56.9B

PV of Terminal Value$24.5B

Exit Multiple Method

Year 10 EBITDA$4.0B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$111.7B

PV of Terminal Value$48.1B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$14.3B

PV of Terminal Value$24.5B

Enterprise Value$38.8B

(-) Net Debt-$521M

Equity Value$39.3B

Shares Outstanding271M

Price per Share$144.77

Exit Multiple Method

PV of Projected FCFs$14.3B

PV of Terminal Value$48.1B

Enterprise Value$62.3B

(-) Net Debt-$521M

Equity Value$62.9B

Shares Outstanding271M

Price per Share$231.68

Pure Model Fair Value

$188.23

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
6.80%	$233.69	$243.50	$256.51	$274.63	$301.57
7.80%	$203.32	$208.96	$216.00	$225.01	$236.98
8.80%	$180.42	$183.97	$188.23	$193.42	$199.90
9.80%	$162.14	$164.52	$167.29	$170.56	$174.49
10.80%	$147.00	$148.67	$150.57	$152.76	$155.32

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$141.73

-52.9% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 1.26

Base Case

$188.23

-37.4% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 1.00

Bull Case

$245.02

-18.5% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.85

Key Assumptions & Drivers• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth13.73%

Year 3 Revenue Growth9.02%

Year 5 Revenue Growth3.75%

Year 7 Revenue Growth3.75%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin36.09%

Tax Rate27.14%

Historical Capex / Rev2.18%

NWC / Revenue0.33%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 28x EV/EBITDA (Technology sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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