Autodesk: A Must-Have Company in the Construction Software Industry (NASDAQ: ADSK)

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Autodesk (NASDAQ:ADSK): The Google of construction and design

Website: Autodesk.com

Current stock price: $197.83

Shares outstanding: 215.9 million

52 week high: $335.48

All-time high: $344.39

52 week bottom: $163.20

Market cap: $42.7 billion

Net cash: -1.47 billion dollars

Enterprise value: $44.2 billion

Headquarters: San Rafael, California

Number of employees: 12,000+

Average analyst price target: $252.00 (~27.4% upside from current price)

Introduction:

I’ve been a big fan of companies like ADSK and Adobe (ADBE) for many years, but I never owned the stocks because they always seemed too expensive (I try to avoid companies with PEG ratios above 1.5x because there’s too much risk in those multiple contracts ). That said, if you’re looking for high-quality, profitable software companies with strong management teams and incredible margins (gross/net), these two companies are worth checking out. ADBE recently announced a $20 billion acquisition of Figma, so I’d stay away from that one for now until we have more clarity on the future financial impact of the deal, which which means we’ll be focusing on ADSK for this mini write-up.

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As you can see above, ADSK is trading near its all-time low NTM P/E multiple, even below March 2020 levels. I fear ADSK’s P/E multiple will continue to shrink over the next few years, which is the main reason I don’t own it. If I thought we would see a multiple expansion, then I would be more inclined to own the stock. Nonetheless, ADSK is a great company with a solid track record that operates in a huge market, so I thought this mini-edit was still warranted even though I don’t have a position.

For what it’s worth, ADSK stock is up 192% over the past 6 years, so it’s been a quality player for shareholders. I think this is the type of action that will work online with the Nasdaq (QQQ) unless they find a way to accelerate revenue and/or grow margins faster than current estimates.

Based on my own investment models, I simply don’t see enough upside over the next few years to warrant a “still” stance.

Lupton Capital Investment Models

Lupton Capital Investment Models

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Lupton Capital Investment Models

ADSK is the company type (along with others like CrowdStrike (CRWD), Data Dog (DDOG), Amazon (AMZN), Uber (UBER), etc.) where you should value them based on free cash flow (FCF) more than net income or profit. That’s why I’ve tried to come up with potential price targets based on bottom line as well as free cash flow.

Summary:

  • Autodesk is the go-to software for architecture, engineering, and construction, with its business model being a 100% SaaS vendor. The company offers design and software services in various industries, including automotive, manufacturing, animation and construction.

  • Healthy growth in a difficult environment; CAGR of 16-20%, equating to revenue of $5 billion and FCF of $2 billion in FY23.

  • The current macro environment presents a significant tailwind with the infrastructure bill of $1.2T and infrastructure spending of $135T globally through 2050 (International Energy Agency). Focus on upgrading old infrastructure with new as we move towards a greener world.

  • Outlook is a continuous innovation internally, whether it’s developing mergers and acquisitions as they are the leader in AEC (architecture, engineering, construction), or a long-term digitization trend and the Metaverse game .

Thesis – Name ESG Pure Play with a long track to build:

Autodesk is a technology company that successfully implements a SaaS model both domestically and internationally. The margins speak for themselves, as management and CEO Andrew Anagnost consistently report strong growth and demand for their services. The shift to digitalization gives Autodesk a competitive advantage as it is already the leader in construction. Moreover, the push towards cleaner and more efficient energy allows them to contribute to the construction of greener infrastructures (smart cities and smart buildings).

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Lupton Capital Models

The main theme: consistency

Autodesk continues to deliver strong YoY metrics, firing on all cylinders. In the most recent quarter, the company produced record Q2 2023 revenue, non-GAAP operating margins and FCF, which offset geopolitical uncertainty. Total revenue of $1.2 billion (+17%) and FCF of $246 million (+32%) year-over-year. AutoCAD, which has been their most important software product since their company was founded, grew by +13%, AEC by +18% and Manufacturing by +16%. Billings were up +17% to $1.2 billion for the quarter, demonstrating the resilience of their business model, despite global headwinds in Europe and Asia. Geographically, strong growth in the USA (+22%), healthy growth in Europe (+15%) despite a recession, and robust growth in APAC countries (+10%), if we exclude China from the ‘equation.

Headwinds in the forex market will remain a factor next year, as the question for them remains whether the euro has bottomed out. Fortunately, thanks to the company’s geographic diversification, it is able to offset this underlying risk. The company’s strong balance sheet allowed them to accelerate their share buyback during the quarter by 1.4 million shares for $257 million at an average price of $182 per share. Finally, they used strong cash to buy back 3.5 million shares in the first half of this year. On the demand side, Kimberly-Horn (a leading design consulting firm in the US) has expanded its Executive Business Agreement (EBA) with Autodesk, showing a backlog of business for both companies.

Look forward:

Management guidance remains unchanged at the midpoint on all metrics, with underlying momentum in activity offsetting headwinds in the currency market. Despite the economic downturn in the United States and around the world, Autodesk continues to maintain its FY23 revenue range of $4.99 billion to $5.04 billion. FactSet estimate of $5.01 billion. Continue to expect a non-GAAP operating margin of approximately 36% and FCF between $2 billion and $2.08 billion. FactSet estimate of $1.98 billion. To finish, adjusted EPS expected $6.52-6.71 Vs. FactSet cost $6.54.

Of course, North America remains a stronghold, while Europe and Asia are experiencing healthy growth. Renewal activity continues to be a highlight and is key to acquiring new customers and those who continue to pay for their service. Ultimately, strong demand and strong competitive performance drove outstanding results in their latest quarter. Investors can expect consistency going forward, regardless of the challenging environment.

Evaluation:

Revenue CAGR of around 15% and Earnings CAGR of 20-25% over the next 4-5 years are the baseline expectations. However, given some of the tailwinds we discussed above, it’s possible that these numbers are conservative. It is also possible that ADSK will make strategic acquisitions that will also accelerate revenues and profits over the next few years.

Even if ADSK continues to grow its earnings at a steady rate, the stock price will remain volatile as it is the multiple that will change much faster based on macro, yields, etc.

Currently, ADSK is trading at 29.7x non-GAAP EPS estimates for FY2023, which is certainly a premium to the S&P 500, but in line with their historical P/E multiple. Given their current EPS growth rates (see below), I think the multiple is fair but certainly not cheap.

Where ADSK looks more convincing, as we saw above, is when you watch FCF. Currently, ADSK is trading at less than 22x FY2023 EV/FCF, which seems low. Looking at the estimates below, my big question is, why do analysts expect FCF to drop 20% next year? And if so, then maybe the current FCF multiple is right.

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Techniques :

Looking at ADSK on a daily 6-month chart, you can see that the stock is currently trading just above the 21d EMA and the 10d EMA. If you were looking to start a technicals based position you could probably start one here but I would have a stop loss below the 21d EMA as there is no technical support below this level until until you get to the trend line in the middle $180. If you are a fundamental and valuation driven investor, your strategy may be very different.

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trend spider

Looking at ADSK on the 6-year weekly chart, you can see this long-term trendline with the middle of this support range at the mid-$170s. This is where I would feel more comfortable buying the stock if I were a long-term investor; however, the large volume shelf doesn’t really provide support until you’re in the $150s. ADSK is currently below the 200w SMA and 200w EMA, both of which are up in the $220s. Sometimes I’d say it’s better to wait for those moving averages to recover; however, in the case of ADSK, if you waited to buy the stock after it had rallied back to $220, I would dispute that the upside over the next 3-4 years would be significantly reduced.

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Conclusion:

If you decide to buy a stock like ADSK, you get a company with a very strong management team and a proven track record. I don’t like the current valuation, although it is one of the leading software companies, so it deserves to trade at a higher price than its peers and the broader market. I would say the same about companies like ADBE, CRM, GOOG, AAPL, etc. – given that ADSK is down almost 45% from the highs, the risk/reward ratio is certainly more attractive now than it was last October.

Age-old trends for Autodesk continue to drive digital transformation into the AEC, enabling them to strengthen their competitive edge. Additionally, the macroeconomic tailwind of this industry is the $1.2 billion infrastructure bill, which Andrew Anagnost (CEO) noted is now slowly pouring money into this space. Autodesk is a pure ESG player in an equity name that believes in designing and building sustainable infrastructure, which will act as an additional tailwind in the transition to an energy-efficient country. Ultimately, it is a technology company that successfully implements a SaaS model both domestically and internationally. The shift to digitalization gives Autodesk a competitive advantage as it is already the leader in construction and at the forefront of sustainability and progress on climate change.

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