Autodesk Stock: Rapid Growth, High Margins, and Strong Moats (NASDAQ:ADSK)

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Autodesk (NASDAQ: ADSK) is a pioneer of CAD or Computer Aided Design. Basically, this company creates software that helps architects and engineers design buildings for real-world construction. The company is a dominant market leader with a series of competitive advantages. More recently, Autodesk has beat revenue and earnings estimates for growth, while the stock price fell 39% from its all-time highs. In this article, I’ll break down the company’s unique business model, finances, and valuation. Let’s dive into it.

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ADSK data by YCharts

business model

Autodesk is the world’s leading CAD software package used by architects, engineers and designers worldwide. As a former design engineer who worked for a large consulting firm, I have insight into the extensive use of the software package. The company enjoys a series of competitive advantages which include; technology, market leadership and network effects. its network effects are particularly attractive, as engineering students, consultants, and designers all need to learn the package in order to collaborate with each other on professional projects. This has led to a huge community of resources, courses, and training programs that the majority (in my opinion) of design engineers have gone through if they haven’t learned on the job for many years. The software package is not easy to learn, but again I think this adds to its “stickiness”, as engineers will be reluctant to learn a new software package, even if it is cheaper for the business, which gives pricing power to Autodesk.

Autodesk Products

Autodesk Products (created by author Ben at Motivation 2 Invest)

A look at Gartner’s review website at alternatives to Autodesk shows, “SketchUp” which is great for creative CAD drawings and designs but does not touch Autodesk on advanced features. Then we have “TurboCAD” which is really just a low cost training program for students. Then we have Siemens Solid edge, which according to reviews is easy to use but more for small builds.

To give you an idea of ​​Autodesk’s scale and advanced features, a brand new building model can be rendered in Autodesk, with precise dimensions and measurements. The beauty of the platform is that it enables cross-team collaboration. So let’s say you have the electrical design team (which I was part of), we’re designing cable trays going through the ceiling of a hotel as an example. But we also want to make sure we don’t bump into any plumbing pipes or mechanical air conditioning equipment. With Autodesk, both teams can work on a common model. So when a change is made by one team, it appears for the other team. This is something that only advanced technology can do.

Autodesk Revit

Mechanical and electrical (Autodesk Revit)

It’s no surprise that Autodesk has a high net revenue retention rate in the range of 100-110%, which means customers find the product “sticky” and spend more. This makes perfect sense for the reasons given above, it is unlikely that a large architectural firm or construction company will terminate their subscription just because business is slow for a month. The platform is the tool of the trade.

Growing finances

Autodesk delivered strong financial results results for the second quarter of 2022. Revenue was $1.24 billion, up a rapid 17% year-over-year and beating analyst estimates of $12.23 million . The beauty of Autodesk is that the majority (98% of its revenue) is recurring and therefore offers more predictability than many companies.

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ADSK revenue estimates for the next financial year data by YCharts

its revenue growth was driven by $1.064 billion in design revenue, which increased 15% year-over-year and 6% quarter-on-quarter. In addition to $113 million in Make Revenue, which increased 26% year-over-year and 27% at constant exchange rates.

By product, [AEC] Architecture, engineering, and construction software accounts for about 45% of Autodesk’s revenue ($564 million) and has seen rapid growth of 18% year-over-year. Next is the second largest segment, AutoCAD and AutoCAD LT, which accounted for $344 million or 28% of revenue and grew 13% year-over-year. its other product segments such as MFG and M&E are also experiencing strong growth of 16% and 26% respectively. This product diversification is a positive sign and should lead to stable revenues in the future.

autocad

AutoCAD (Q2 Revenue Report)

“Billings” is an interesting metric commonly used for subscription companies. This is the amount billed to customers and gives an accurate idea of ​​future revenue. For example, if a customer signed a 3-year, $30,000 contract with Autodesk, the company would charge him $10,000 per year. So in this case, its total billings were up 17% year-over-year to $1.191 million, showing strong demand overall.

Remaining performance obligations [RPO] is the sum of deferred revenue and order backlog. Where deferred revenue is the contractual obligation to deliver the product for the invoiced period. Moreover, Backlog is the future obligation of the contract.

In this case, the total of the remaining performance obligations [RPO] was $4.7 billion and the current RPO was $3.1 billion, which was up 13% and 10% respectively. This reflects strong growth in multi-year contract billings and volume. Additionally, it was great to see a slight increase in long-term deferred revenue as a percentage of total deferred revenue, reflecting the growth of multi-year contracts, which lock in predictable revenue.

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ADSK gross profit margin data by YCharts

its GAAP operating profit was $242 million, up 63% year-on-year from the $148 million generated in the second quarter. This was driven by a 6% increase in GAAP operating margin to a healthy 20%, which was above historical levels.

Management’s continued cost discipline, combined with high operating leverage due to low fixed costs, drove this healthy margin increase.

Earnings per share [EPS] [GAAP] was $0.85, which beat analysts’ estimates of $0.07.

Cash flow from operations was $257 million, up $55 million with free cash flow of $246 million, up $60 million year-over-year.

Management showed confidence and repurchased $1.4 million worth of shares for $257 million, at an average price of about $182 per share. Autodesk has a strong balance sheet with $1.5 billion in cash, cash equivalents and short-term investments. However, the company has a fairly high total debt of around $3 billion, the good news is that only $350 million is due in the short term.

Stable guidance

We’ve seen many companies cut their forecasts on a scary outlook in the second half of 2022 and into 2023. But according to Autodesk’s case management, business terms are “broadly unchanged” from their perspective. This speaks to the moat and strong stickiness of the company’s products, which I talked about in the business model section.

The company is expected to experience slight currency headwinds from a strong US dollar. However, its orientations are “unchanged” halfway “for all measurements”. Autodesk’s “underlying momentum” should offset any headwind from FX, which is a positive sign.

Autodesk Advanced Assessment

In order to value Autodesk, I incorporated the latest financial data into my advanced valuation model which uses the discounted cash flow valuation method. I projected revenue growth of 17% per year over the next 5 years, which is in line with historical levels.

Autodesk Inventory Valuation 1

Autodesk Inventory Valuation 1 (created by author Ben at Motivation 2 Invest)

I also forecast that the company’s operating margins will continue to increase to 28% over the next 5 years, thanks to cross-selling opportunities.

Autodesk 1 review

Autodesk 1 review (created by author Ben at Motivation 2 Invest)

Considering these factors, I get a fair value of $148 per share, the stock trades at $202 per share and is therefore 36% overvalued at the time of writing. This overvaluation comes as no surprise given the company’s exceptional market, with high retention rates, predictable revenue and many competitive advantages. To put things into perspective during the stock market crash of 2020, Autodesk fell to a low of $140 per share and has a 52-week low of $164 per share. So these are the type of stocks that I expect to always be “overvalued” to some degree, except in extreme circumstances.

The good news is that Autodesk’s valuation multiples have compressed significantly with a price/earnings ratio [FWD] = 31 , on a non-GAAP basis, which is 57% cheaper than its 5-year average of over 70. In addition, its price-to-sales ratio [PS] Ratio = 8.9 which is 27% cheaper than its 5-year average.

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ADSK PE report (front) data by YCharts

Risks

High valuation

Autodesk has been one of my favorite companies for a long time and I’ve bought and sold the stock many times. The company is “overvalued” most of the time due to the quality of the company and its strong position in the market. its valuation multiples have compressed but given the number of “cheap” stocks in the market, it is still a little spicy.

Recession/Construction industry

Based on my own knowledge of the industry and management’s own perspective, I don’t imagine Autodesk’s existing revenues will be too affected by a recession. However, it’s worth bearing in mind that this is still a software package used primarily for construction, so a downturn in this industry could lead to a temporary slowdown in new product purchases.

Final Thoughts

Autodesk is a formidable company with a series of competitive advantages. It has generated steady growth and increased margins over the past few years. However, the high valuation means that the price of this stock is still a little spicy and I expect that to continue except in extreme circumstances. The key would be to write down the buy points I mentioned earlier and if the stock drops to those then loading the truck wouldn’t be a bad idea.