Cadence Design Systems Inc (NASDAQ:CDNS) stock dropped by more than 10% on July 17. The trigger came from an unlikely place. Chinese AI lab Moonshot released Kimi K3, an open-weight model with 2.8 trillion parameters. A blog post claimed that the model had designed and verified a working nano-chip in 48 hours using only free open-source design tools.
That claim immediately hurt Cadence stock. The company sells the software that engineers use to design semiconductors. Its pricing power rests on the idea that chip design is too complex to do any other way. A model that appears to bypass it with free tools threatens that idea directly.
Why the Selloff Misses the Point
Investors appear to have misread what actually happened, triggering the selloff. Starting with the chip itself, K3 designed a 45nm chip, which is technology from around 2008. The chips powering AI today are built at 3nm and 2nm, where the difficulty does not rise gradually but increases exponentially. Designing a 45nm chip says very little about its ability to design an advanced one. There is also a simpler point being missed. K3 did not replace design software. It used it.
Open-source tools are not new either. They have been around for decades, yet tech giants like Nvidia, Apple, and TSMC still pay companies like Cadence. Foundries build their process kits jointly with the company, and not many factories will manufacture a chip that has not passed sign-off using its certified tools. The company is also building AI design agents of its own, automating the same work K3 demonstrated, only at the nodes that actually matter.
The Real Risk Isn’t This Model
The bigger concern is not this model, but where China is heading. Washington restricted exports of chip design software years ago and imposed a full ban last summer. That has pushed China to build its own alternatives. China’s domestic tools remain a generation behind at leading-edge nodes, which is precisely why K3 reached for open-source in the first place. If it succeeds over the next several years, Cadence loses a market it cannot easily replace.
The selloff has left the stock’s valuation looking more reasonable. Cadence trades at a forward P/E FY 2026E of 41.4x, which is modestly below its 5-year average of 46x. The forward Price to Sales ratio has also fallen below the 5-year average, resulting in an attractive entry point for investors.
What the Smart Money Shows
The data behind the share price decline doesn’t support a fundamental shift. Short interest sits at just 2.2% of Cadence’s float, nothing out of the ordinary. According to Insider Monkey’s database, Cadence was held by 66 hedge funds at the end of the first quarter, up from 65 in the previous quarter.
The market treated a 45nm demo as though it threatened chips built at 2nm. It does not. If anything, K3 showed why these tools are needed, since it could not do the job without them. Both stocks now trade below their own averages on sales, and the businesses behind them did not change on Friday. The selloff looks like an opportunity rather than a warning.
While we acknowledge the risk and potential of CDNS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CDNS and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: Top 10 Extreme Value Stocks To Buy Now and 8 Hidden Multibagger Stocks to Buy Now.
Disclosure: None. Follow Insider Monkey on Google News.
