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Cadence Design Systems, Inc. (NASDAQ:CDNS) shareholders might be concerned after seeing the share price drop 23% in the last quarter. But that scarcely detracts from the really solid long term returns generated by the company over five years. We think most investors would be happy with the 225% return, over that period. To some, the recent pullback wouldn't be surprising after such a fast rise. The more important question is whether the stock is too cheap or too expensive today.
While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Over half a decade, Cadence Design Systems managed to grow its earnings per share at 1.2% a year. This EPS growth is lower than the 27% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That's not necessarily surprising considering the five-year track record of earnings growth. This optimism is visible in its fairly high P/E ratio of 60.48.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
Dive deeper into Cadence Design Systems' key metrics by checking this interactive graph of Cadence Design Systems's earnings, revenue and cash flow .
A Different Perspective
We regret to report that Cadence Design Systems shareholders are down 25% for the year. Unfortunately, that's worse than the broader market decline of 2.0%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Longer term investors wouldn't be so upset, since they would have made 27%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. Is Cadence Design Systems cheap compared to other companies? These 3 valuation measures might help you decide.
Of course Cadence Design Systems may not be the best stock to buy. So you may wish to see this free collection of growth stocks.