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Ishan Majumdar
Ishan Majumdar
Articles (47) 

Autodesk: The Outperformance Continues

The company delivered yet another solid quarter as the stock trades at over 13 times revenue, making investors wonder about the scope for future appreciation

December 02, 2019 | About:

One of the most important characteristics that technology investors seek in the companies they are investing in is the level of product stickiness and the recurrence of revenues. It is these two factors that are responsible for the high premiums on which software as a service companies trade, particularly industry leaders like Autodesk Inc. (NASDAQ:ADSK). The San Rafael, California-based company is virtually an industry leader in the segment of industrial and technical drawings as well as building information models. Its stock has generated promising returns over the years and is in an interesting position today as investors are evaluating how much longer the company’s dream run can continue.

Autodesk’s multi-industry solutions

The essence of Autodesk’s innovative solutions is to help companies transform concepts into reality. Interestingly, while most investors associate the company and its growth with the construction and real estate sectors, Autodesk’s product applications are far more diversified.

The company caters to the entire manufacturing sector with products such as Fusion 360, which help in the unification of design, engineering,and manufacturing onto a single platform. In fact, most recently, the company announced a partnership with ANSYS (NASDAQ:ANSS) to help its customers make use of the latter’s simulation solutions while carrying out workflow design through Fusion 360.

With respect to the media and entertainment industry, it is evident that Autodesk’s products are becoming more and more relevant as the use of digital platforms and computer-generated imagery is increasing. This division is expected to be a major revenue contributor in the future.

When one analyzes the company’s core business (i.e., construction), the innovative efforts of the team are clearly visible. Over and above the existing versions of the AutoCAD and the BIM 360 (another solid product that is rapidly gaining mileage in the builder community of developing nations), the company announced the Autodesk Construction Cloud with the vision of delivering a unified data solution on a single platform. Its purpose is to serve as a robust network of professionals and firms and provide predictive analytics solutions to help builders across all phases of construction. With such a wide variety of products in place catering to multiple industries and performing well across geographies, there is little that can slow down Autodesk’s growth at the moment.

Another strong quarter, but conservative guidance

Autodesk managed to deliver a fantastic quarter in terms of revenue as well as earnings, beating analyst expectations on both counts. The company reported a top line of $842.7 million, which was significantly above the analyst consensus estimate of $825.75 million and a huge improvement from the $660.9 million reported in the prior-year quarter. The company’s total annual recurring revenue grew 28% and its total billings increased 55%, which is truly remarkable and also the reason behind the strongly positive market sentiment. This top-line growth was largely driven by the two biggest segments of Autodesk’s business: construction and manufacturing.

The current operating margin of 8.09% has been achieved by the management after a significant amount of effort over the years. In terms of the earnings per share, the company reported 78 cents per share, which was above the 72 cents per share predicted by analysts and more than twice the earnings per share reported a year ago (29 cents).

However, management decided to be more prudent in terms of its guidance and marginally reduced its expected revenue for fiscal 2020 to a range of $3.4 billion to $3.44 billion, down from $3.43 billion to $3.49 billion, citing a possible impact of the U.S.-China trade war. For the upcoming quarter, they are expecting an even higher top-line in the range of $880 million to $895 million with earnings per share between 42 cents and 47 cents.

There is a high premium attached to Autodesk’s valuation

As per the above chart, the value of Autodesk’s stock has tripled over the last five years. While the company’s revenue growth has been healthy, it has not grown in proportion with the share price. The answer lies in the enterprise value-to-revenue multiple, which has shown a huge amount of expansion from around four to as much as 12.8 today. This implies that the market sentiment associated with the stock grew more and more optimistic over the past five years.

Interestingly, this perception cannot be attributed only to its growing ARR as, during the entire period, the company had recurring revenue of more than 80% of its total top line. Hence, it is pure investor optimism that is making the stock so pricey. While there is no immediate reason why this optimism would diminish until a bad result or some bad news hit the company, there is also the possibility that it may have reached its peak. This could well mean that from now on, investors might not see the multi-bagger returns they have been experiencing over the years as they now have to rely on revenue growth alone for the stock price appreciation.

Key takeaways

While Autodesk is fundamentally a solid company with a strong core business and decent financials, there is little doubt that the stock is too expensive.

The reason for its overvaluation is its ARR accounts for 96% of the total revenue (a number that has actually increased from 92% in the third quarter of 2018). In fact, Autodesk’s strategic acquisitions are also adding to this ARR growth and contributed to as much as $115 million of the total ARR in the previous quarter. A high percentage of recurring revenue is always valued by the market with a significant premium and the best example of this is Microsoft (NASDAQ:MSFT). With such high multiples, the stock might not be a buy currently, but it is certainly worth holding as the company continues its expansion across the globe.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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