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He’s not the only one, either.

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Director of Research, Traders Agency





Further Reading from MarketBeat

A Hidden Monopoly: Why AI Can’t Exist Without Cadence

Author: Jeffrey Neal Johnson. Published: 1/22/2026. 

Cadence logo over EDA screen showing chip layout, highlighting AI-driven semiconductor design software.

What You Need to Know

  • The company integrates generative AI into its design suite to drastically improve productivity and power efficiency for semiconductor engineers.
  • Massive demand for custom silicon from major technology firms is driving record backlog orders for the Palladium and Protium hardware emulation systems.
  • Strategic acquisitions enable the company to expand beyond chip design into full-system analysis and multiphysics simulation for broader industrial markets.

While retail investors pile into crowded trades like NVIDIA (NASDAQ: NVDA) or TSMC (NYSE: TSM), sophisticated capital is looking upstream. The real bottleneck of the artificial intelligence (AI) revolution is not just manufacturing capacity; it is also design complexity. The AI revolution runs on silicon, but that silicon can’t reach production without the software that maps designs into manufacturable, verified chips.

This dynamic has transformed Cadence Design Systems (NASDAQ: CDNS) from a legacy software vendor into a critical computational-twin platform.

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Cadence effectively operates as the toll collector of the semiconductor industry. No advanced AI chip—whether from a merchant seller like NVIDIA or a hyperscaler like Google—can move to production without licensing Cadence’s intellectual property and using its emulation platforms. Currently trading around $307 per share, the stock has seen recent volatility, falling roughly 7% over the past three months.

For investors with a long-term horizon, that consolidation offers a strategic entry point into a company that has become indispensable infrastructure for the AI era.

Physics vs. Engineers: The 2nm Challenge

The semiconductor industry faces a major physics problem. As chipmakers push toward 2nm node architectures and gate-all-around transistors, the complexity of placing billions of transistors on a sliver of silicon has outstripped human capacity. Manual design processes that worked in the past are impractical—or impossible—at this scale. That creates an existential crisis for chipmakers and a massive opportunity for Cadence.

Cadence has responded by integrating generative AI directly into its design suite. Tools like Cadence Cerebrus (for chip implementation) and Verisium (for verification) use AI to automate layout and testing. These programs are more than productivity enhancers; they are essential to economic viability.

For example, Samsung Foundry reported notable results after adopting Cadence’s AI-driven tools:

  • 4x improvement in productivity: Engineers completed designs four times faster than with legacy tools.
  • 22% power reduction: AI-optimized layouts cut chip power consumption by 22%, a critical gain for data centers.

When a software tool can materially improve product performance while slashing development time, adoption becomes mandatory. That technological leverage strengthens Cadence’s pricing power and makes its software highly sticky—customers can’t switch platforms without risking their product roadmaps.

The Hardware Supercycle: Pre-Silicon Supercomputers

Although Cadence is best known for software, a meaningful portion of its recent growth comes from hardware. Before a company spends tens or hundreds of millions to manufacture a cutting-edge chip, it must test it virtually. Cadence provides that capability through emulation systems such as the Palladium Z3 and Protium X3.

These systems act as pre-silicon supercomputers. They create a digital twin of a chip, enabling engineers to run software on the design before a physical silicon wafer exists. Demand for these systems is surging with the rise of custom silicon.

Major tech giants—hyperscalers—are increasingly designing their own processors to optimize data-center efficiency and performance rather than buying off-the-shelf chips.

Every custom chip program requires massive emulation capacity. That demand helped drive Cadence’s backlog to about $7 billion in the third quarter of 2025. A large, visible order book like this provides revenue visibility and acts as a financial floor even if the broader economy softens.

The Strategic Moat: Sovereign Silicon and System Analysis

Cadence is also benefiting from geopolitical fragmentation. As countries shore up domestic technology supply chains through tariffs and regulations, the trend known as sovereign silicon is forcing regions to buy independent sets of design licenses and hardware.

Even with strict export controls, Cadence’s business in China has normalized and grown year over year, underscoring the essential nature of its tools. The company did pay a $140.6 million settlement in 2025 related to historical export compliance, but global demand remains robust.

Cadence is expanding its moat beyond chips. In September 2025, it signed a definitive agreement to acquire Hexagon AB’s Design & Engineering business for approximately €2.7 billion (about $3.17 billion). That deal represents a strategic pivot from Electronic Design Automation (EDA) toward System Design & Analysis (SDA).

With Hexagon’s technology, Cadence can simulate not just the chip but the entire physical system it inhabits, including:

  • Thermal dynamics: Modeling heat flow in an AI data center.
  • Structural integrity: Testing physical stress on automotive chips in self-driving vehicles.
  • Aerodynamics: Simulating airflow for aerospace applications.

This diversifies Cadence’s revenue base and positions it to capture value across the industrial ecosystem. After closing, the SDA segment’s run rate is expected to exceed $1 billion in 2026.

Financially, Cadence remains disciplined. Despite the large acquisition, management plans to return at least 50% of free cash flow through share repurchases. That commitment to shareholder returns, combined with projected revenue growth near 14% for fiscal 2025, reflects a team focused on both innovation and value creation.

Betting on the Architect: Why Cadence Is the Safer AI Trade

Investors must weigh Cadence’s premium valuation against its defensibility. Trading at a price-to-earnings (P/E) ratio near 79, the stock is priced for high expectations.

That premium is partly justified by a business model with about 80% recurring revenue.

In a gold rush, the safest play is often selling the picks and shovels. In the AI surge, Cadence sells the physics engine that enables intelligence. Whatever chipmaker wins on performance or whichever nation expands manufacturing, Cadence still gets paid.

Cadence’s analyst community remains constructive, maintaining a Moderate Buy consensus with an average price target of $380.72—implying roughly 24% upside from current levels. For investors seeking AI exposure without picking a hardware winner, Cadence can serve as a foundational holding.

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Published by RJ Hamster

I was born on 6 August 1956 in San Francisco, California to Janet and (the late) Richard Hovis. I grew up in Santa Monica, California where I attended elementary, junior high school, and high school (graduating in 1974), in addition to involvement in sports and recreation (Little League +, the Boy’s Club ++). Further, it was in elementary school – St. Augustine’s By-the -Sea Parish School that I found, and made the choice to truly journey with God. I attended Arizona State University from 1974 to 1977 – seeking to become an architect, however, I was not accepted, and, as such, I graduated with a Liberal Arts degree. Upon graduation from Arizona State University, I attended Cal Poly San Luis Obispo and studied City and Regional Planning at the Master’s level. I successfully completed one (1) year in a two (2) year program – I did not complete the Master’s degree in City and Regional Planning – due to personal reasons. I returned to Santa Monica where I started (October 1979) my career as graphic designer with Exxon Company, USA. I spent five years with Exxon Company, USA. While working with Exxon Company, USA I was accepted into architectural school – Sci-Arc in Southern California, however, I did not attend preferring to stay with Exxon.. In 1982 I married Laura Flosi and in April 1983 we had our one and only child – Lauren Alain Hovis – a gift from God. We moved to Phoenix, Arizona in 1984 from Los Angeles, where I went to work as a graphic designer with Kitchell CEM (from 1985 -1987). From 1987 – 1995 I was an independent contractor, and a registered representative in mortgage finance, financial management, graphic design, and drafting. Further, I attended the University of Phoenix and successfully obtained a Master’s in Business Administration (MBA) in 1982. I was also a member of the Scottsdale Jaycees, where I became very involved in community events and projects. In 1994, I accepted a cartography position with the Defense Mapping Agency in Reston, Virginia. As such, I relocated from Phoenix to Reston. In 1998, I was accepted and worked as a Visual Information Officer with the Central Intelligence Agency. In 2002, I worked as a Support Officer until my retirement (due to a need for shoulder surgery) in September 2018. Away from my Federal Government service, I have been involved in various organizations and activities in Northern Virginia. In November of 2011, I married Rebecca Ouellette in Santa Monica, California. I reside in San Tan Valley, AZ with my two hamster - Jess and Timothy, our fish, our lizard - RJ Lizard., and our cats - Pearl and Grey. As to hobbies, I enjoy playing sports, attending sporting events, mentoring individuals from financial management to hamsters, building models, photography, travel, multimedia design, managing partner for RJ Hamster, and jazz – smooth jazz to a samba or a bossa nova. Love and God Bless, Peter – aka RJ Hamster Jo hi

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