Ddetermining what is a “want” versus a “need” can be difficult when purchasing software. No company can buy all types of software. During difficult times, some essential software is cut. In most businesses, one or two programs are needed. Identifying which software vendors fall into this recession-proof category can drive investor success. Autodesk (NASDAQ: ADSK) and Unity software (NYSE: U) each provides critical software for its customers.
Go to any construction site and ask the contractors for a blueprint or rendering of the structure, and chances are it was created using one of Autodesk’s offerings. Customers cannot stray from Autodesk products. An architectural or engineering firm that cannot produce plans or drawings is useless. TechRadar recently released its list of the best architecture software of 2021, and four of the eight programs were from Autodesk. Autodesk simply manages the space.
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The maker of basic products like AutoCAD and Revit sold annual editions of its software that engineers or architects could use forever. Today, Autodesk has moved to a subscription model, which creates growth for loyalists. By doing this, Autodesk controls how much the price will increase each year, and customers are required to comply.
In the second quarter, Autodesk’s revenue increased 16% to $ 1.1 billion. Recurring revenue makes up 98% of that total, making it a predictable business to run. With a gross margin of 90%, Autodesk has enough leeway to turn a profit. It generated operating income of $ 148 million and free cash flow of $ 186 million. It also maintained a revenue retention rate of between 100% and 110%, demonstrating its adherence. It drives 19% revenue growth for its fiscal year, reaching nearly $ 5 billion in revenue. Autodesk is also forecasting a 31% free cash flow margin, allowing it to build up cash.
Autodesk is trading at 46 times futures earnings, exactly the same valuation as Adobe, another software company with strong margins and a persistent subscription model. While it isn’t cheap, 46 times isn’t a terrible price to pay for a business with predictable growth and impressive profitability. Businesses as vital as Autodesk don’t come often. Investors looking for a successful company that doesn’t burn profits for growth should have Autodesk on their watch list.
Video game designers are Unity Software’s main customers. It provides the tools to build games as well as methods to monetize and grow the game’s user base. Unity is a must have for small creators who cannot afford to develop their own platforms. Without it, designers wouldn’t have the tools to release new games.
Unity’s customers are expanding their usage, as evidenced by its 142% net revenue retention rate. It also increased its revenue in the third quarter by 43% and expects growth of around 30% in the fourth quarter. However, investors can expect revenue to rise, as Unity was forecasting 31% growth in the third quarter when it released its forecast for the second quarter.
Unlike Autodesk, Unity is not profitable. It lost $ 0.41 per share last quarter, which equates to a negative net margin of 40%. It generates free cash flow, so the business won’t need additional funding to survive. As Unity does not generate any profit, it should be valued using a price / sales ratio. With over 50 times the sales, Unity is one of the most expensive stocks on the market today. Investors can justify this by pointing to the expansion of games and the growth of Unity. A high valuation doesn’t make Unity a bad business, just a tricky investment.
For future growth plans, Unity extends its 3D prowess to industrial use cases. It enables its customers to use either augmented reality (AR) or virtual reality (VR), taking their designs to a new level of authenticity. It competes with Autodesk’s 3D animation tools in this space. Although this market is smaller than that of video games, it represents the option of Unity.
Autodesk and Unity are both essential for customers. Without the software provided by everyone, businesses would not be able to perform basic day-to-day functions. While both represent great stock ideas, investors should be aware of each company they buy. Autodesk won’t provide huge growth, but it is reasonably priced and should provide reliable feedback. Unity presents a higher risk, but could provide monster returns if the investment thesis were to succeed. Finding stocks that clients couldn’t do without is a smart strategy when picking stocks. Autodesk and Unity are two that fall under this unique designation.
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Keithen Drury owns shares of Adobe Inc., Autodesk and Unity Software Inc. The Motley Fool owns and recommends Autodesk and Unity Software Inc. The Motley Fool recommends Adobe Inc. The Motley Fool has a disclosure policy.
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