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Electronic design automation (EDA) company Cadence Design Systems (NASDAQ: CDNS) plays a vital role in the semiconductor industry. Access to advanced EDA software is non-negotiable for companies designing semiconductors. Adding to Cadence’s importance is the fact that it controls a very large portion of the EDA market. Analysts estimate that Cadence and Synopsys (NASDAQ: SNPS) each hold around 30% market share in this space.

Despite Cadence’s enviable position, the stock has delivered middling returns as of late. Over the past 52 weeks, the stock has returned between 5% and 10%.

An overall sell-off in software stocks has hit Cadence shares, despite the fact that Cadence sees AI optimization as a strength of its business, with the ability to deliver substantial gains to customers.

Shares just got a shot in the arm, rising nearly 8% after the company’s latest earnings release. Let’s break down the firm’s new report and assess the outlook for CDNS shares going forward.

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CDNS Puts Up Solid Q4 Metrics and 2026 Guidance

In Q4 2025, Cadence’s revenue came in at $1.44 billion, growing by around 6% year-over-year, slightly exceeding analyst expectations of $1.42 billion. 

The company’s adjusted earnings per share (EPS) also grew by approximately 6% to $1.99. This moderately exceeded estimates of $1.91. Notably, Cadence saw its adjusted operating margin rise by an impressive 310 basis points in 2025 and its free cash flow increase by a whopping 42%.

Looking into 2026, Cadence expects to generate full-year revenue of $5.95 billion and adjusted EPS of $8.10, based on midpoint figures.

These numbers were in line with or slightly ahead of expectations, implying growth near 13% for both figures. 

This indicates a small deceleration compared to Cadence’s 2025 full-year revenue growth of 14%, and a more substantial deceleration from its full-year 2025 adjusted EPS growth of 20%.

Overall, Cadence sees itself maintaining solid top-line growth and continuing to expand margins in 2026. It also expects to generate free cash flow of approximately $1.79 billion, implying 13% growth.

Revenue Backlog and AI Productivity Gains Are Promising

Importantly, Cadence enters 2026 with strong revenue visibility. Its backlog hit a record $7.8 billion. The firm says that around two-thirds of its 2026 revenue (approx. $4 billion) will come from this beginning backlog. This indicates that almost half of its backlog extends past 2026, providing multi-year visibility.

While markets worry that AI disruption will significantly damage the future growth of software companies, Cadence has a completely different take. The company itself is offering a variety of AI tools to customers, and according to Cadence, demand is robust.

The firm says it is seeing demand for its AI tools from “almost every customer”, and that those customers are “engaging rapidly” to deploy the technology. Given the significant value Cadence says these products can create, this isn’t surprising.

Its ChipStack AI Super Agent is the world’s first agentic AI solution for automating chip design and verification. Cadence notes that it can increase productivity on various tasks by up to 10x. Its AI-driven Cerebrus product helps engineers more intelligently optimize and explore chip designs.

When creating new chip designs, engineers run experiments to balance power, performance, and area (PPA). Traditionally, an engineer might only be able to run three to five experiments at once. However, with agentic-AI workflows, they can run 10 to 100 at once.

This is one of the ways that Cadence believes chip designers can improve PPA by 7% to 12% using AI optimization. That’s equal to around “half or almost the same gain” that comes from a node migration, or the move to a more advanced manufacturing process. Node migrations are expensive and can take two to three years. The potential for customers to achieve significant PPA improvements through Cadence’s AI tools strengthens its value proposition. Still, actual improvements will vary on a case-by-case basis.

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CDNS: Top-Tier Semiconductor Stock With Analyst Support

The consensus price target on Cadence sits near $377. This figure implies substantial upside in the stock of around 27%. Targets updated after Cadence's earnings report are slightly less optimistic, averaging around $368. However, these numbers still indicate solid potential, suggesting that shares could rise by 24%.

Cadence is not a cheap stock, trading at a forward price to earnings (P/E) ratio of 36x. Still, the company maintains a very strong position in its industry. There are also reasons to believe that AI will benefit the firm much more than it could hurt it. Overall, Cadence remains a solid long-term play on advancements in semiconductor technology.

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