⁠Dimitry Nakhla | Babylon Capital®
Cadence Design $CDNS Reports a Strong Q3 🎯

✅ Revenue: $1.22B vs $1.18B (est)

✅ Adjusted EPS: $1.64 vs $1.44 (est)

⬆️ Guidance

#stocks #investing https://t.co/3ymSzdkMc3

A sober valuation analysis on $CDNS 🧘🏽‍♂️

•NTM P/E Ratio: 37.49x
•5-Year Mean: 42.46x

•NTM FCF Yield: 2.10%
•5-Year Mean: 2.43%

As you can see, $CDNS appears to be trading near fair value

Going forward, investors can receive ~12% MORE in earnings per share & ~13% LESS in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $CDNS is a great business

BALANCE SHEET✅
•Cash & Short-Term Inv: $1.23B
•Long-Term Debt: $1.00B

$CDNS has a strong balance sheet, a BBB+ S&P Credit Rating & 27x FFO Interest Coverage

RETURN ON CAPITAL✅
•2020: 20.0%
•2021: 22.0%
•2022: 29.5%
•2023: 30.3%
•LTM: 21.4%

RETURN ON EQUITY✅
•2020: 26.0%
•2021: 26.6%
•2022: 31.0%
•2023: 33.9%
•LTM: 29.4%

$CDNS has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2013: $1.46B
•2023: $4.09B
•CAGR: 10.85%

FREE CASH FLOW✅
•2013: $322.68M
•2023: $1.25B
•CAGR: 14.47%

NORMALIZED EPS✅
•2013: $0.86
•2023: $5.15
•CAGR: 19.59%

SHARE BUYBACKS🆗
•2018 Shares Outstanding: 281.14M
•LTM Shares Outstanding: 272.98M

By reducing its shares outstanding ~3%, $CDNS increased its EPS by ~3.1% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 88.5%
•LTM Operating Margins: 28.9%
•LTM Net Income Margins: 25.4%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~12% MORE in EPS & ~13% LESS in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $CDNS has to grow earnings at an 18.75% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be less than the (18.75%) required growth rate:

2024E: $5.89 (14.1% YoY) *FY Dec

2025E: $6.92 (17.4% YoY)
2026E: $8.28 (19.7% YoY)

$CDNS has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $CDNS ends 2026 with $8.28 in EPS & see its CAGR potential assuming different multiples:

37x P/E: $306.36💵 … ~9.5% CAGR

35x P/E: $289.80💵 … ~6.8% CAGR

33x P/E: $273.24💵 … ~3.9% CAGR

31x P/E: $256.68💵 … ~1.0% CAGR

While it’s certainly reasonable for $CDNS to trade for >37x, I wouldn’t want to rely on that assumption as it doesn’t leave us with a substantial margin of safety

However, something to keep in mind, 89% of $CDNS total revenue is recurring, while 11% comes from "up-front" sources, such as hardware and IP product deliveries

It's a VERY sticky business and a critical player at the forefront of the AI and Semiconductor revolution 🤖

So it’s one of those businesses that will likely always appear to be expensive with the occasional once-every-five-year type of drop leading to an attractive purchase price with substantial margin of safety

Today at $251💵 $CDNS appears to be fairly valued, perhaps worth a nibble

Considering my margin of safety requirements, I’d get more interested in $CDNS closer to $200💵 (20% below today’s price) where I can reasonably expect 12.10% CAGR while assuming a 31x multiple

#stocks #investing
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𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲. - Dimitry Nakhla | Babylon Capital®
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⁠Stock Analysis Compilation
Patient Capital Management on Kosmos Energy $KOS US

Thesis: Kosmos Energy’s inflecting free cash flow, combined with undervaluation and strong reserves, presents a significant growth opportunity and potential acquisition appeal.

(Extract from their Q3 letter) https://t.co/jbsxMDjSRF
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⁠Ahmad Jivraj
“Bitcoin represents an attempted hostile takeover of the world’s currency system.”

@PeterLBrandt

What an awesome quote
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⁠Dimitry Nakhla | Babylon Capital®
~14 months ago I published the bull case for $PYPL on Benzinga

Perhaps my favorite part is where I suggested flipping “the script”

These narratives often highlight Mr. Market & his emotional craziness often driven by fear & greed

#stocks #investing
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https://t.co/P8QYF9LbRP https://t.co/H2BJMOlXtC
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⁠Quiver Quantitative
RT @InsiderRadar: 🚨 New CEO Insider Purchase

The CEO of $CSGP just reported the purchase of ~$1M of the company's stock.

This is the first insider purchase at the company in over 5 years. https://t.co/hQh4hHxsvc
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⁠Capital Employed
83 Q3 letters now added 😎

Includes letters from @alluvialcapital and @eriksen_tim - both well worth a read.

https://t.co/z8VTurKKQI https://t.co/uPwrZz4xcu
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⁠Hidden Value Gems
A new position in David Poppe’s Giverny Capital - Medpace Holdings, providing clinical trial tests for small biotech companies. The founder owns 17%, stock at 25x PE.

$MEDP

The link to the full Q3 letter in reply. https://t.co/5ktdHceiDS
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⁠Hidden Value Gems
Quote of the day #112 https://t.co/9wsufq43zf
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⁠Startup Archive
Elon Musk explains first principles thinking and uses it to predict 80%+ decline in battery prices

“First principles is a kind of physics way of looking at the world. And what that really means is you boil things down to the most fundamental truths and then reason up from there.”

People typically reason by analogy because it’s easier—we do something because that’s the way it has always been done or it’s what everyone else is doing.

First principles thinking requires a lot more energy, but it’s useful for inventing new things.

Elon gives battery prices as an example.

In this 2012 interview, he recounts how everyone told him: “battery packs are really expensive and that’s the way they’ll always be because that’s the way they’ve been in the past.”

But Elon thinks this way of reasoning is “pretty dumb” and prevents people from arriving at new and better ideas.

At the time, the cost of batteries were $600 per kilowatt hour (kWh). But Elon suggests he can do better using first principles thinking:

“So first principles thinking would be to say, okay, what are the material constituents of the batteries? What is the spot market value of the material constituents? It’s got cobalt, nickel, aluminum, carbon, some polymers for separation, and a steel can. So break that down on a material basis and say, okay, if we bought that on the London Metal Exchange, what would each of those things cost? It’s $80/kWh. So clearly, you just need to think of clever ways to take those materials and combine them into the shape of a battery cell. And then you can have batteries that are much, much cheaper than anyone realizes.”

In 2023, the price for electric vehicle battery packs hit a new low of $128/kWh ($95/kWh in 2012, adjusted for inflation).

Video source: @kevinrose (2012)
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