Autodesk: attractive, but expect a better entry price (NASDAQ: ADSK)

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Although Autodesk, Inc. (NASDAQ: ADSK) the stock is down 31.5% year-to-date, and while I credit Autodesk with a multi-year growth outlook of 15-20% CAGR for the next 5 years, I initiate my hedging on Autodesk with a hold recommendation. In this article, I ADSK value based on a residual income model – backed by consensus analyst forecasts through 2026, a WACC of 8.5% and a terminal growth rate equal to nominal GDP growth. My base target price implies that Autodesk is currently valued at fair value, referring to a target price of $189.64/share.

Company Description

Autodesk, Inc. is a PC software and multimedia tools provider, internationally recognized for its flagship AutoCAD design tool. The company is a world leader in 3D design, engineering and entertainment software. The company’s software is used across industries by engineers, architects and media professionals to model, animate and render objects. from Autodesk largest operating segment is AEC architecture, engineering and construction, which accounts for approximately 40% of revenue, followed by manufacturing/prototyping generating 20% ​​of revenue, followed by the AutoCAD business, which generates nearly 30% of revenue. Notably, subscription revenues are almost 85% of sales – support the business with sustainable and recurring revenue streams. Autodesk software is sold worldwide, with the United States accounting for approximately 35% of sales.

Autodesk Business Overview

Autodesk Investor Presentation

Structural carrying winds

Autodesk is poised to benefit not only from global tailwinds related to an acceleration of digitalization and ESG, but also from emerging technology themes such as the metaverse.

From early 2022, most Autodesk customers use the company’s software on-premises, with cloud computing accounting for only about 8%. This implies that there is a great opportunity for the company to move to a Cloud-based SaaS model, which could fuel demand due to better user experience – offering benefits such as real-time data updates, tele-collaboration and access from any device/location. According to a McKinsey study, “Rise of the Platform Age: The Next Chapter in Construction Technology”, the construction industry is one of the least digitized and least productive industries, behind even agriculture. Going forward, as construction accelerates its digitization efforts, Autodesk’s AEC business is well positioned to follow the trend.

Autodesk Growth Potential

Autodesk Investor Presentation

Over the past month there has been a lot of hype and speculation connected to the metaverse. While discussion about the design and structure of the Metaverse remains heated, it is undeniable that over the next few decades we will see an acceleration towards virtual/augmented reality. 3D modeling software vendors such as Autodesk play a leading role in building the infrastructure of the metaverse.

Finally, there is ESG. The construction and engineering industry is arguably one of the largest waste contributors, containing a variety of materials, including concrete, metals and plastic. Going forward, as the push towards ESG is likely to intensify, the construction and engineering industry will increasingly turn to software that helps companies optimize their design, prototyping and construction.

Autodesk Sustainability

Autodesk Investor Presentation

Latest developments

Autodesk has delivered quite a successful 2022 financial year. Total revenue was $4.39 billion, up 16% from 2021. In detail: design revenue was $3.87 billion, manufacturing revenue was $364 million and maintenance revenue was $76 million. Notably, recurring revenue accounted for 96%. The number of subscribers was 6.04 million, representing a net year-over-year increase of 757,000 subscribers. Despite the significant growth in activity, however, GAAP operating income was slightly disappointing at $618 million, compared to $629 million last year. This is a decrease of 1.7%. The GAAP operating margin was 14%. Cash flow from operating activities strengthened from $1.440 million to $1.530 million. Autodesk ended the year with $1.809 million in cash and cash equivalents and $3.060 million in total debt.

Autodesk management has given strong orientation for the new exercise. Revenue is expected to increase to approximately 5.020 to 6.025 million, representing a 14% to 17% year-over-year increase. GAAP operating margin is expected to strengthen to around 21%. EPS GAPP between $3.74 and $4.11 per share and free cash flow to the business of $2.130 to $2.210 million.

Evaluation

To evaluate Autodesk, I selected the Residual Earnings Framework, which is widely considered to be a very reliable tool. valuation tool for value investors. My main assumptions are:

  • I base my EPS estimates on analyst consensus through 2026.
  • I apply the CAPM model to derive the cost of equity and in a second step I calculate the WACC (8.5%) according to the trading leverage.
  • As for the terminal growth rate, I think growth equal to the estimated long-term nominal GDP growth is adequate, if not underestimated. However, investors should be careful in paying for high terminal value growth.

My calculation returns a base price per share of $189.64 and therefore concludes that ADSK is currently valued at fair value. However, since investors might want to choose different WACC and TV growth rate assumptions, I have also attached a sensitivity table. Feel free to select the scenario that best represents your fundamental view of Autodesk. For reference, red cells imply overvaluation relative to the current market price, and green cells imply undervaluation.

Autodesk Assessment

Analyst consensus, author’s calculations

Autodesk Valuation Sensitivity Analysis

Analyst consensus, author’s calculations

Alternatively, investors could also consider a valuation based on multiples. I suggest using a 30% discount on the 2-year average of 47x EPS. Based on an estimated EPS of $8.11 for 2024, ADSK would be valued at $266.82/share. However, please note that a valuation based on multiples does not tell investors anything about the fundamental investment. Please use the calculation with caution.

Risks

Investors should monitor the following risks: First, a deterioration in the macroeconomic environment, including inflation and supply chain challenges, could negatively impact Autodesk’s customer base. If the challenges prove more severe and/or last longer than expected, Autodesk’s financial outlook should be adjusted accordingly.

Second, Autodesk has done some important work Mergers and acquisitions transactions (Spacemaker in 2020 and Innovyze 2021). M&A transactions always carry the risk that integration challenges will arise and synergies will not materialize within the expected scope.

Third, Autodesk suffers from product piracy and non-compliant users.

Fourth, rising real yields will add significant headwinds to ADSK stock price as higher discount rates affect the valuation of growth assets such as Autodesk.

Conclusion

Autodesk is definitely an interesting company – a solid company with great potential for growth. In my view, ADSK is well positioned to benefit from some of the strongest structural trends including digitalization, cloud/subscription business models, virtual reality and ESG.

But is the company undervalued? It depends on your valuation. If you use a valuation based on multiples, as most investment banking analysts do, you will find a fair price > $250/share. If, however, you choose the discounted earnings valuation, which is more reflective of business fundamentals, then Autodesk is valued correctly. I recommend the latter and therefore conclude my article with a holding valuation and a fair base target price of $189.64/share.